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Accounting-based equity valuation model

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Reference no: EM13213007

After careful financial statement analysis, we obtain these predictions for Colin Technology:

Year

Net Income

Beginning Book Value

Year

Net Income

Beginning Book Value

1

$1,034

$5,308

5

$1,278

$6,728

2

1,130

5,292

6

1,404

7,266

3

1,218

5,834

7

1,546

7,856

4

1,256

6,338








Colin Technology"s cost of equity capital is estimated at 13 percent.

Required:

a. Abnormal earnings are expected to be $0 per year after Year 7. Use the accounting-based equity valuation model to estimate Colin"s value at the beginning of Year 1.

b. Determine Colin"s PB ratio using the results in (a ). Colin"s actual market-based PB ratio is 1.95. What do you conclude from this PB comparison?

c. Determine Colin"s PE ratio using the results in (a ). Colin"s actual market-based PE ratio is 10. What do you conclude from this PE comparison?

d. If we expect Colin"s sales and profit margin to remain unchanged after Year 7 with a stable book value of $8,506, use the accounting-based equity valuation model to estimate Colin"s value at the beginning of Year 1.

Reference no: EM13213007

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