E5.3. A Residual Earnings Valuation (Easy) An analyst presents you with the following pro forma (in millions of dollars) that gives her forecast of earnings and dividends for 2010-2014. She asks you to value the 1,380 million shares outstanding at the end of 2009, when common shareholders' equity stood at $4,310 million. Use a required return for equity of 10 percent in your calculstices. 2010 2011E 2012E 2013E 2014E Earnings Dividends 388.0 570.0 599.0 629.0 660.4 115.0 160.0 349.01 367.0 385 A

a. Forecast book value, return on common equity (ROCE), and residual earnings for each of the years 2010-2014.

b. Forecast growth rates for book value and growth in residual earnings for each of the years 2011-2014.

c. Calculate the per-share value of the equity from this pro forma. Would you call this a Case 1, 2, or 3 valuation?

d. What is the premium over book value given by your calculation? What is the P/B ratio?