Revision Question

FLIM FLAM plc have forecast earnings and dividends for the next five years as per the following:

Year $1($M$)2($M$)3($M$)4($M$)5($M$)$

Earnings $40\mathrm{.}945\mathrm{.}049\mathrm{.}353\mathrm{.}558\mathrm{.}0$

Dividends $10\mathrm{.}211\mathrm{.}914\mathrm{.}215\mathrm{.}016\mathrm{.}3$

The market Capitalisation of FLIM FLAM plc was approximately $522$M at the end of year $0.$ FLIM

FLAM plc$$s book value for equity at the end of year $0$ was $253$M$.$

FLIM FLAM plc have a cost of equity $($re$)$ of $10\%.$

After receiving this forecast you received an update note with news that FLIM FLAM plc have

announced a new share issue in year $1$of $65$M$.$ This has resulted in modified forecast as per the

following:

Year $1($M$)2($M$)3($M$)4($M$)5($M$)$

Earnings $40\mathrm{.}951\mathrm{.}556\mathrm{.}4561\mathrm{.}3766\mathrm{.}65$

Dividends $10\mathrm{.}211\mathrm{.}914\mathrm{.}215\mathrm{.}016\mathrm{.}3$

Note that the $65$M raised from shareholders in year $1$ has not been accommodated in these

dividend forecasts.

Required:

$$ What was FLIM FLAM plc$$s actual PBR $($P$/$B Ratio$)$ at the end of year $0?$

$$ Using the revised earnings forecasts, forecast the book value for equity for FLIM FLAM plc for

all years $1-5$;

$$ Forecast residual earnings for FLIM FLAM plc for all years $1-5$;

$$ Use these figures to estimate an intrinsic value for the equity of FLIM FLAM plc as of the end

of year $0$ and an estimated PBR $($P$/$B Ratio$)$ for the company at this time;

$$ Comment on your estimates.