Unit 4 Instant Feedback Task Notlonglived Inc.'s expected earnings per share are $1.50, $1.80, and $5.00 for the following three years. Dividends are estimated at $1.00, $1.50, and $5.00 for the same period. The company plans to liquidate after the third year, with the last dividend distributing all remaining value to the shareholders. Notlonglived's shares book value is $7, and the required rate of return on equity is 10%. Estimate per-share book value and residual income in all three years. Estimate the present value of the stock using residual income. Solution: Column Column Column Column Example 1 2 3 4 Year EPS Dividends 0 1 2 3 $1.50 $1.80 $5.00 $1.00 $1.50 $12.80 Required rate of return on equity Retained earnings (E - D) 10.00% 10.00% 10.00% $0.50 $0.30 -$7.80 Ending book value (previous BV + retained earnings) $7.00 $7.50 $7.80 $0.00 Net income (= EPS) $1.50 $1.80 $5.00 Less equity charge (rx Beginning BV) Residual income (Net income - Equity Charge) $0.70 $0.75 $0.78 $0.80 $1.05 $4.22 PV = Bo+ 00 RI (1+r) t=1 0.8 1.05 4.22 PV = 7+ + + (1+0.1) ' (1+0.1) PV=7+0.73 + 0.87 +3.17 (1+0.1) PV = 11.77 Questions: GoodTimes Inc.'s expected earnings per share are $2.00, $3.00, and $6.00 for the following three years. Dividends are estimated at $1.00, $1.50, and $16.50 for the same period. The company plans to liquidate after the third year, with the last dividend distributing all remaining value to the shareholders. GoodTimes Inc.'s shares' book value is $8.00, and the required rate of return on equity is 8%. 1) Estimate per-share book value and residual income in all three years. 2) Estimate the present value of the stock using residual income.