Question

Applications E5.9. Residual Earnings Valuation: Black Hills Corp (Easy) Black Hills Corporation is a diversified energy corporation and a public utility holding com- pany. The following gives the firm's earnings per share and dividends per share for the years 2000–2004. 1999 2000 2001 2002 2003 2004 EPS DPS BPS 2.39 1.06 3.45 1.12 2.28 1.16 2.00 1.22 1.71 1.24 9.96 Suppose these numbers were given to you at the end of 1999, as forecasts, when the book value per share was $9.96, as indicated. Use a required return of 11 percent for calculations below. a. Calculate residual earnings and return of common equity (ROCE) for each year, 2000–2004. b. Value the firm at the end of 1999 under the assumption that the ROCE in 2004 will continue at the same level subsequently. Would you call this a Case 1, Case 2, or Case 3 valuation? c. Based on your analysis, give a target price at the end of 2004.

Answer 1

Answer 59 Residual Earnings valuation : Black Hills coup :- forecast year. 1999 2000 2001 2002 2003 2004 9.393.45 2.28 2.00 171 1.06 1.12 1.16 1.227.24 EPS DPS. BPS 19.96/11:29 | 13.62/14.74 15.52/15.99 94. 38.61. 16-74 13.67.11.07 1.294 2.208 0.782 0.3790.003 1.110 1.232 1.368 1.518 1685 1.166 1792.0.572 0.250 0.002 • ROCE RECIMI. Charge) Discount (1:11+ Present value of RE Total present value do RE to 20.04 continuing value.com) - Present value do cv value per share 0.00 @ ROCE and residual Earnings are in above table. The residual Earnings are expected to be acro, if Roce is to continue at 114. of ter 2004.. The continuing value is 2010). The value is $13.74 per share na case a valuation.

© The target price is equal to forecasted kps do $15.99 at dooy, as the CV = 0.