E13.11. Levered and Unlevered P/E Ratios (Medium) The following pro forma was prepared for a firm at the end of 2009 (in millions of dollars); 2009A 2010E 2011E 2012E Net operating assets 1,300 1,300 1,300 1,300 Net financial obligations 300 300 300 300 Common shareholders' equity 1,000 1,000 1,000 1,000 Operating income 135 135 135 Net financial expense 15 15 Earnings 120 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 similar to those in 2012

a. Forecast the value of the operations and the value of the equity at the end of years 2010 10 2012.

b. Forecast the levered and unlevered P/E ratios at the end of years 2010 to 2012. Make calculations for both the expected trailing P/E and the forward P/E.

c. Can you infer the required return for equity from the levered P/E ratios?

Real World Connection This exercise builds on the examples in Table 13.5 and Table 13.6. Applications