Reference no: EM132211757

Question - You are given the following information for Young Company. As of year, 1, the company's book value is $80,000 and its cost of capital is 15%.

	Year 1	Year 2	Year 3	Year 4	Year 5
Sales	$150,000	$163,000	$171,000	$177,000	$188,000
Operating expenses	($115,000)	($123,500)	($131,000)	($135,300)	($146,735)
Depreciation	($12,000)	($13,100)	($14,300)	($14,900)	($15,300)
Net Income	$23,000	$26,400	$25,700	$26,800	$25,965
Dividends	$6,500	$5,500	$5,800	$8,200	$6,504
Expected book value	$80,000	$96,500	$114,300	$147,300	$173,100
Expected ROCE	28.75%	26.34%	24.57%	22.89%	22.00%

Dividends for Year 6 and beyond are expected to remain at Year 5 level.

A. Calculated Young's abnormal earnings (residual income) for each of the Years 1 to 5.

B. Use an accounting-based valuation model to estimate the value of Young's equity on January 1st of Year 2, Year3, Year 4, and Year 5.

C. Use the PB Ratio formula to determine the PB ratio for Year 2, Year 3, and Year 4.