Your client has requested advice as to whether to keep or not their current equity

holding in Richmond plc. The following information is available to you for the purposes of your analysis.

i.Earnings available for ordinary shareholders for the year 2019 were 110m.

ii.The opening net book value for the year 2020 is 600m.

iii.Forecast revenue for 2020 is 280m and is expected to grow by 10% per annum

in 2021 and 2022.

iv.Net operating margin for the years 2020 2022 is forecast to be 42%.

v.Post 2022 the future growth of residual earningsis forecast to be 3% per

annum.

vi.Richmond plcs cost of equity is estimated to be 8%.

vii.The shares priceof Richmond plc at the start of 2020 is 16.00 per share.

viii.The number of shares in issue is 110 million.

ix.Richmond plc has never paid a dividend and intends to continue with this

policy for the foreseeable future.

REQUIRED:

1.Estimate the value of Richmond plcs share price as at 1 January 2020 using

the:

i.Residual Earnings Valuation Model (REVM) and

ii.Abnormal Earnings Growth Model (AEGM)

2.Explain possible reasons for the difference between the book value per share

and your estimates of Richmond plcs share price.

3.Explain the relative merits of the Residual Earnings Valuation Model (REVM)

and the Abnormal Earnings Growth Model (AEGM) in valuing a companys

equity.