E6.9. Residual Earnings and Abnormal Earnings Growth: IBM (Medium) Consider the following pro forma for International Business Machines (IBM) based on analysts' forecasts in early 2003. 2003E 2004E Next Three Years Earnings per share 4.32 5.03 Growth at 11% Dividends per share 0.60 0.67 Growth at 11%

The book value of IBM's common equity at the end of 2002 was $23.4 billion, or $13.85 per share. Use a required return for equity of 12 percent in calculations.

a. Forecast residual eamings for each of the years 2003-2007.

b. Forecast abnormal earnings growth for each of the years 2004-2007.

c. Show that abnormal earnings growth is equal to the growth in residual earnings for every year. Real World Connection Exercises E13.14 and E14.11 deal with IBM, as does Minicase M[2.3.