On January 1, 1991, you are considering the purchase of ABC Company's common share. You have collected
Question:
On January 1, 1991, you are considering the purchase of ABC Company's common share. You have collected the following information on ABC Company:
1. Book value for common share on January 1, 1991 is $12 per share.
2. Predicted net income for 1991 is $2 per share and net income is expected to increase by 10% every year until 1995.
3. ABC is expected to pay $0.2 dividends per year from 1991 to 1995.
4. After 1995, abnormal earnings will grow by 5% per year.
5. ABC's beta is estimated to be 1.2. The risk-free rate of return is estimated to be 6.6% and the market risk premium is 7%. You should use the CAPM model to estimate the equity cost of capital for ABC Company.
Required:
Using the abnormal earnings formula, compute the estimated equity value per share of ABC Company on January 1, 1991. Your answers must show the steps of computations for any credits.
Financial and Managerial Accounting the basis for business decisions
ISBN: 978-0078111044
16th edition
Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello