Question: A Simple Valuation and Reverse Engineering: IBM (Medium) The following are key numbers from IBM's financial statements for 2004.
IBM shares traded at $95 when 2004 results were announced. Use a required return for operations of 12.3 percent to answer the following questions:
a. Forecast operating income and residual operating income for 2005 if IBM maintains the same core RNOA as in 2004.
b. Calculate the per-share value of the equity in IBM were to maintain this profitability in the future and if residual earnings were to grow at the 2004 sales growth rate. Also calculate the implied forward enterprise P/E ratio and the enterprise P/B ratio.
c. What growth rate in residual operating incorne would justify the current stock price if you were sure that 12.3 percent was a reasonable required return?