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After careful financial statement analysis, we obtain these predictions for Colin Technology:
Year
Net Income
Beginning Book Value
1
$1,034
$5,308
5
$1,278
$6,728
2
1,130
5,292
6
1,404
7,266
3
1,218
5,834
7
1,546
7,856
4
1,256
6,338
Colin Technology"s cost of equity capital is estimated at 13 percent.
Required:
a. Abnormal earnings are expected to be $0 per year after Year 7. Use the accounting-based equity valuation model to estimate Colin"s value at the beginning of Year 1.
b. Determine Colin"s PB ratio using the results in (a ). Colin"s actual market-based PB ratio is 1.95. What do you conclude from this PB comparison?
c. Determine Colin"s PE ratio using the results in (a ). Colin"s actual market-based PE ratio is 10. What do you conclude from this PE comparison?
d. If we expect Colin"s sales and profit margin to remain unchanged after Year 7 with a stable book value of $8,506, use the accounting-based equity valuation model to estimate Colin"s value at the beginning of Year 1.
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