The following are key numbers from IBMs financial statements for 2004. IBM's shares traded at $95 when 2004 results were announced. Use a required return for operations (rw) of 12.3 percent to answer the following questions: Net operating assets, end of year $42,104 Million Net financial obligations, end of year 12,357 million Common equity, end of year 29,747 million Common shares outstanding 1,645.6 million Core return on net operating assets 18.8 % Sales growth rate 8.8%

A. Forecast NOPAT and residual operating income for 2005 if IBM maintains the same core RNOA as in 2004. (10 points) (Hint: NOPAT2005 = NOA2004 Core RNOA2004 ReOI2005 = NOPAT2005 rw x NOA2004 )

B. Calculate the per-share value of the equity if IBM were to maintain this profitability in the future and if residual operating income were to grow at the 2004 sales growth rate. (5 points)

C. What growth rate in residual operating income would justify the current stock price if you were sure that 12.3 percent was a reasonable required return? (5 points)

D. Prepare a valuation grid showing what the stock is worth for alternative forecasts of return on net operating assets and growth in sales.