1. Robert Sumargo, an equity analyst, is considering the valuation of Google (NDQ:-

GOOG), in late 2013 when a recent closing price is \($896.57.\) Sumargo notes that in general GOOG had a fairly high ROE during the past 10 years and that consensus analyst forecasts for EPS for the next two fiscal years reflect an expected ROE of around 19 percent. Sumargo expects that a high ROE may not be sustainable in the future. Sumargo usually takes a present value approach to valuation. As of the date of the valuation, GOOG does not pay dividends; although a discounted dividend valuation is possible, Sumargo does not feel confident about predicting the date of a dividend initiation. He decides to apply the residual income model to value GOOG, and uses the following data and assumptions:

• According to the CAPM, GOOG has a required rate of return of approximately 8.5 percent.

• GOOG’s book value per share on 31 December 2012 was \($217.54\).

•\) ROE is expected to be 21 percent for 2013. Because of competitive pressures, Sumargo expects GOOG’s ROE to decline in the following years and incorporates an assumed decline of 0.5 percent each year until it reaches the CAPM required rate of return.

• GOOG does not currently pay a dividend. Sumargo does not expect the company to pay a dividend in the foreseeable future, so all earnings will be reinvested. In addition, Sumargo expects that share repurchases will approximately offset new share issuances.

Compute the value of GOOG using the residual income model (Equation 4).