Question: Levered and Unlevered P/E Ratios (Medium) The following proforma was prepared for a firm at the end of 2009 (in millions of dollars):
The firm has a required return for its operations of 9 percent and a 5 percent after-tax cost of debt. Pro forma financial statements after 2012 are forecasted to be the same a those in 2012.
a. Forecast the value of the operations and the value of the equity at the end of years 2010 to2012.
b. Forecast the levered and unlevered PIE ratios at the end of years 2010 to 2012. Make calculations for both the expected trailing P/E and the forward PIE.
c. Can you infer the required return for equity from the levered PIE ratios?