Summer Gompers is valuing Transpacific Corporation. Summer has made the following assumptions: Book value per share is estimated at $10.50 at the end of this year. Earnings per share (EPS) will be 25% of the beginning book value per share for the next five years. Cash dividends paid will be 35% of EPS. At the end of the five -year period, the market price per share will be five times the book value per share. The beta for the stock is 0.60, the risk-free rate is 5.0%, and the equity risk premium is 5.5%. The current market price of Transpacific is $68.25, which indicates a current price-to-book value (P/B) of 6.5.

Required:

a. Prepare a table that shows the beginning and ending book values, net income, and cash dividends annually for the five-year period (10 marks).

b. Estimate the residual income and the present value of residual income for the five years (10 marks).

c. Estimate the value per share of Transpacific stock using the residual income model (5 marks)