1. At the beginning of its fiscal year 2019, an analyst made the following forecast for KMG, Inc. (in millions of dollars):

	2018	2019	2020	2021	2022	2023
EPS		3.50	3.20	2.78	2.25	1.71
DPS		1.65	1.55	1.15	1.05	1.12
BPS	8.75

Suppose these numbers were given to you at the end of 2018, as forecasts, when the book value per share was $8.75, as indicated and market price of the stock was $10.50 per share. Use a required return of 9 percent for calculations below. You have to fill in the table below to show your working process.

a. Calculate residual earnings (RE) and return of common equity (ROCE) for each year, 20192023.

[5 marks]

b. Value the firm at the end of 2018 under the assumption that the ROCE in 2023 will continue at the same level subsequently.

[3 mark]

c. Based on your estimate, should investors buy the share of this company?

[2 mark]

	2018	2019	2020	2021	2022	2023
EPS
DPS
BPS
ROCE
RE
Discount rate
Present value of RE
Total present value of RE to 2023
CV
Present value of CV