Problem
ABC, Inc is expected to generate EPS of $6.00, $4.00, and $2.00 for the next three years. Analysts expect that GE will pay dividends of $3.00, $2.00, and $17.00 for the three years. The last dividend is anticipated to be a liquidating dividend; analysts expect GE will cease operations after Year 3. GE's current book value is $10.00 per share, and its required rate of return on equity is 10 percent. Assume the clean surplus relation holds.
i. Compute the ending book value per share in Year 2.
ii. Calculate the residual income per share in Year 3.
iii. Estimate the stock's value using the residual income model.