FSA Company's Forecasted Financial Data

(In billions)

2020

2021

2022

2023

2024

Net income

1.64

1.69

1.74

1.79

1.84

Year end Book Value of equity

5.58

5.64

5.70

5.75

5.81

a. Explain what is an accounting based equity valuation model. Using the data given above, estimate FSA's value at the beginning of year 2020. Assume that the abnormal earnings are expected to be zero after year 2024. Use the accounting based equity valuation model.

b. Determine the fundamental Price to Earnings (PE) ratio. If the actual Price to Earnings ratio is 18.3, what would your recommendation be to the shareholders? Determine the fundamental Price to book (PB) ratio. If the actual Price to Book ratio is 5.27, what would your recommendation be to the shareholders? Explain your answer.