Question 3 (8 points) Consider the following per-share numbers from the accounting reports of a firm

Cost of Capital 9%

Estimate

2016 2017 2018 2019 2020

Book Value (end of year) 200 203 211.27 215.29 221

Dividends (end of year) 20 15 10 15

Income 12 14 16.5 18.5

a. Do these numbers follow clean surplus relations? Verify. (1 points)

b. What would be the estimate of other comprehensive income in years 2017, 2018 and 2019? (1 points)

c. What is the Residual Income of the firm on years 2017, 2018, 2019? (1 points)

d. Based on the residual income what do you think will be the market value of the share at the end of 2020? Why? (2 points)

e. Some analysts are impressed with the earnings growth while some analysts have commented that the firm is approaching at a steady state of operation, because it is just covering the cost of capital. How would you assess this claim? Support your assessment with calculations.