Question: A Residual Earnings Valuation (Easy) An analyst presents you with the following pro forma (in millions of dollars) that gives her forecast of earnings and dividends for 2013-2017. She asks you to value the 1,380 million shares outstanding at the end of 2012, when common shareholders' equity stood at $4,310 million. Use a required return for equity of 10 percent in your calculations.
a. Forecast book value, return on common equity (ROCE), and residual earnings for each of the years 2013- 2017.
b. Forecast growth rates for book value and residual earnings for each of the years 2014- 2017.
c. Calculate the per-share value of the equity from this pro forma. Would you call this a Case 1, 2, or 3 valuation?
d. What is the premium over book value given by your calculation? What is the P/B ratio?