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.