'If all underlying assumptions are consistent, all equity valuation approaches including the dividend discount model (DDM), the residual income model at equity level (RIVM), the abnormal earnings growth model (AEG), and the P/E multiple should, in theory, generate the same value of equity shares.' You want to verify the above statement yourself by collecting the following information for Grange PLC. The firm has a beta of 1.2, the risk free rate is 3% and the market risk premium is 3.5%. You may assume that the cost of equity is given by the capital asset pricing model (CAPM). Current book value is 10 per share. The forecast earnings per share (EPS) for the next three years are: Year 1, 0.8; Year 2, 0.832; Year 3, 0.865 The company has a constant dividend payout ratio of 50% for the next three years. For year 4 and beyond, the forecast growth in book value and earnings will be 4% per year

(c) Calculate the value of Grange PLC using the forward P/E at the beginning of Year 2 and Year 3. Explain the conditions under which the P/E multiple can generate consistent results. (16 marks)

Note that: I also recommend you use the backward approach to check if you can get the same results. It is not acceptable if you simply claim that the RIVM and AEG will generate the same results after you calculate the value of firm by using the DDM. You must provide the intermediate calculations by using the DDM, RIVM and AEG. Look at the handouts for establishing P/E = (1-q)/(r-g) and explain each of these variables.

(d) Discuss any possible reasons why the DDM and RIVM models may not reconcile in practical valuation