Question
6. You have been provided the following actual financial information from the reformulated financial statements of Lillooet Inc. for the year 2021, and then a
6. You have been provided the following actual financial information from the reformulated financial statements of Lillooet Inc. for the year 2021, and then a set of forecasted financial information for the three-year period, 2022 2024.
2021 Actual: sales = $800,000
Shareholders Equity = $50,000
2022 Forecasts: sales growth = 5%
operating profit margin after tax = 0.10
asset turnover ratio = 1.90
net financing expenses = $15,000
2023 Forecasts: sales growth = 5%
operating profit margin after tax = 0.10
asset turnover ratio = 2.0
net financing expenses = $15,500
2024 Forecasts: sales growth = 5%
operating profit margin after tax = 0.10
asset turnover ratio = 2.0
net financing expenses = $16,000
In conjunction, you have also been provided with the following additional information:
- the forecasted growth rate in comprehensive income after tax (CI) after 2024 is 2.5%
- Lillooets cost of equity capital is 9%
- Lillooets net borrowing cost (NBC) after tax is 4%
- Lillooet has no Other Comprehensive Income (OCI) items to report during any years
- Lillooet has 1 million common shares outstanding
Using the Abnormal Earnings (ReCI) valuation model, what is the intrinsic value of a common share of Lillooet Inc. based on the forecasts and additional information presented above?
1. | $1.09 | |
2. | $1.35 | |
3. | $1.04 | |
4. | $0.84 |
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