Reference no: EM131896027

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

Year Net Income Beginning Book Value

1 $1,034 $5,308

2 1,130 5,292

3 1,218 5,834

4 1,256 6,338

5 1,278 6,728

6 1,404 7,266

7 1,546 7,856

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

Required:

1. 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.

2. Determine Collin's PB ratio using the results above. Colin's actual market-based PB ratio is 1.95. What do you conclude from this PB comparison?

3. Determine Colin's PE ratio using the results above. Colin's actual market-based PE ratio is 10. What do you conclude from this PE comparison?

4. 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 model to estimate Colin's value at the beginning of year 1.