E5.4. Residual Earnings Valuation and Target Prices (Medium) The following forecasts of earnings per share (EPS) and dividend per share (DPS) were made at the end of 2009 for a firm with a book value per share of $22.00: EPS DPS 2010E 2011E 2012 2013E 2014E 3.90 3.70 3.31 3.59 3.90 1.00 1.00 1.00 1.00 1.00 The firm has an equity cost of capital of 12 percent per mum.

a. Calculate the residual earnings that are forecast for each year, 2010 to 2014.

b. What is the per-share value of the equity at the end of 2009 based on the residual income valuation model?

e. What is the forecasted per-share value of the equity at the end of the year 2014?

d. What is the expected premium in 2014?