Question - E&K Company has a net book value of $220,000. The company has a 10% cost of capital. The firm expects to have profits of $45,000; $40,000 and $35,000 respectively for the next three years. The company pays no dividends and depreciation is 5% per year of book value.
a. Using the excess earnings model, should the firm be valued at more or less than its book value?
b. What, if anything, are the company's abnormal earnings for the next three years?
c. What is your best estimate of the firm's value using the excess earnings model?