Calculate the forecast of residual earnings

Reference no: EM131491152

Question: Simple Forecasting and Valuation (Medium) An analyst uses the following summary balance sheet to value a firm at the end of 2012 (in millions of dollars):

The analyst forecasts that the firm will earn a return on net operating assets (RNOA) of 12 percent in 2013 and a residual operating income of $91.4 million.

a. What is the required rate of return for operations that the analyst is using in his residual operating income forecast?

b. The analyst forecasts that the residual opera ting income in 2013 will continue as a perpetuity. What value does this imply for the equity?

c. Calculate the forecast of residual earnings (on common equity) for 2013 that is implied by these forecasts. The firm's after-tax cost of debt is 6.0 percent.

Reference no: EM131491152

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