Question 4 As an analyst, you are asked to value the 1300 million shares outstanding of Company PCC at the end of 2012, when common shareholders' equity stand at $4100 million. Based on preliminary reports from the company, you have made the following forecast of earnings and dividends for 2013-2017 (in millions). Your required return for equity is 9 percent. 2012 A Earnings Dividends 2013 E 388 115 2014 E 570 160 2015 E 599 349 2016 E 629 367 2017 E 660.4 385.4 (i) Use the residual earnings (RE) model to calculate the per-share value of the equity from this pro forma. Would you call this a Case 1, 2, or 3 valuation? 3 (ii) Suppose the company decides to write down its inventory by $120 million, following the lower-of-cost-or-market rule, at the end of 2012. This is the inventory that will be sold in 2013. Will your forecast of earnings change? What is the value of the equity? (iii) Suppose the company decides not to pay any dividends for 2013-2017. Forecast the book value and residual earnings for each of the years 2013-2017. What is the value of the equity? (Note this part has nothing to do with part (ii.) Question 4 As an analyst, you are asked to value the 1300 million shares outstanding of Company PCC at the end of 2012, when common shareholders' equity stand at $4100 million. Based on preliminary reports from the company, you have made the following forecast of earnings and dividends for 2013-2017 (in millions). Your required return for equity is 9 percent. 2012 A Earnings Dividends 2013 E 388 115 2014 E 570 160 2015 E 599 349 2016 E 629 367 2017 E 660.4 385.4 (i) Use the residual earnings (RE) model to calculate the per-share value of the equity from this pro forma. Would you call this a Case 1, 2, or 3 valuation? 3 (ii) Suppose the company decides to write down its inventory by $120 million, following the lower-of-cost-or-market rule, at the end of 2012. This is the inventory that will be sold in 2013. Will your forecast of earnings change? What is the value of the equity? (iii) Suppose the company decides not to pay any dividends for 2013-2017. Forecast the book value and residual earnings for each of the years 2013-2017. What is the value of the equity? (Note this part has nothing to do with part (ii.)