Company A's earnings declined significantly during the 2020 financial year during but will, according to an analyst's estimate, recover to R23.00 per share in 2021. In the past, Company A has been able to earn an average return on equity (ROE) of 20%. Company A is currently trading at R215.00 per share. You are provided with selected financial information from Company A's financial statements in the table below:

 

1.1  Calculate Company C's residual income for 2021.

 

1.2 Calculate the intrinsic value per share for Company A, using the single- stage constant-growth residual income model. (3)

 

1.3 Calculate Company A's justified price-to-book value. 

1.4 Calculate Company A's leading and trailing P/E ratios. 

 

1.5 Evaluate Company A's valuation relative to its peers and intrinsic value. Motivate why a portfolio manager should or should not consider including Company A in an equity portfolio. 

 

1.6  Based on the information in the table, how is Company A's earnings yield expected to change? Motivate your answer without performing any calculations.

 

Item Book value per share Earnings per share Dividends per share Dividend pay-out ratio Growth rate in dividends Cost of equity Risk-free rate P/E of competitors 2020 R57.50 R10.00 R0.00 17% 10% 22x 2021 R75.90 R23.00 R4.60 20% 16% 17% 10% 16x