E5.1. Forecasting Return on Common Equity and Residual Earnings (Easy) The following are earnings and dividend forecasts

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E5.1. Forecasting Return on Common Equity and Residual Earnings (Easy) The following are earnings and dividend forecasts made at the end of 2009 for a firm with $20.00 book value per common share at that time. The firm has a required equity return of 10 percent per year. 2010 2011 2012 EPS DPS 3.00 0.25 3.60 4.10 0.25 0.30

a. Forecast return of common equity (ROCE) and residual earnings for each year, 2010-2012

b. Based on your forecasts, do you think this firm is worth more or less than book value? Why?

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