Question

Question 3. 5 Marks Use the residual income valuation model and the forecasts and the other relevant data from the table below to compute equity value per share. 2007 2008 2009 2010 2011 2012 2006 forecast forecast forecast forecast forecast forecast Cost of capital for equity (r.) & discount factors 11.00% 1.110 1.232 1.368 1.518 1.685 1.870 Cost of capital (WACC) and discount factors 10.73% 1.107 1.226 1.358 1.843 RI Model - Terminal value growth rate 2.05% Sales Profit margin (PM) Free cash flows (FCF) Net transactions with shareholders (d) 2,048,947 2,479,226 19.0% 19.0% - 189,371 -126,557 58,395 70,658 2,925,487 3,364,310 19.0% 19.0% -63,964 29,742 | 83,376 95,883 3,868,957 4,449,300 19.0% 19.0% 34,204 3 9,334 110,265 | 126,805 Net operating assets (NOA) Net operating profit after tax (NOPAT) 2,845,760 3,443,370 389,300 471,053 4,063,177 4,672,653 5,373,551 6.179,584 555,843 639,219 735,102 845,367 Shareholders' equity (BVE) Comprehensive income (CI) Number of common share on issue 1,991,985 2,300,882 2,657,686 3,067,298 3,530,9644,064,465 4,678,300 367,292 427,463 492,988 559,549643,767 740,640 771,781

Answer 1

		2006A	2007F	2008F	2009F	2010F	2011F	2012F
	Sales		20,48,947	24,79,226	29,25,487	33,64,310	38,68,957	44,49,300
	NOPAT (A)		3,89,300	4,71,053	5,55,843	6,39,219	7,35,102	8,45,367
	Book Value of Common Equity	19,91,985	23,00,882	26,57,686	30,67,298	35,30,964	40,64,465	46,78,300
	Beginning BV of Common Equity		19,91,985	23,00,882	26,57,686	30,67,298	35,30,964	40,64,465
	(Beginning BV of Equity) X (Cost of Equity) (B)		2,19,118	2,53,097	2,92,345	3,37,403	3,88,406	4,47,091
	Residual Income (A-B)		1,70,182	2,17,956	2,63,498	3,01,816	3,46,696	3,98,276
	Cost of capital and discount factor (C)		1.107	1.226	1.358	1.503	1.664	1.843
	Present Value of Residual Income (A-B) / C		1,53,732	1,77,778	1,94,034	2,00,809	2,08,351	2,16,102
	Return on Common Equity:
	Cost of Equity:	11%
	Present Value of Equity Calculations:
	Current Value of Common Equity:	19,91,985
	Sum of PV of Residual Income:	11,50,806
	Terminal Growth Rate:	2.05%
	Estimated Year 6 NOPAT	8,45,367
	Residual Income Terminal Value:	40,10,185	=(8,45,367*1.0205) - (46,78,300 * 11.0%) / (10.73%-2.05%)
	PV of Res. Inc. Terminal Value:	21,75,900	=40,10,185/1.843
	Present Value of Equity:	53,18,692	=19,91,985 + 11,50,805 + 21,75,900
	Shares Outstanding:	7,71,781
	Share Price:	6.89	=53,18,692 / 7,71,781