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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.
This paper reviews the article of ‘the impact of the global economic crisis on the business environment' that is written by Roman & Sargu (2011).
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