Question

Question1 Based on analyst forecasts of profit and (closing) equity for JBH in the following table, what is the total equity value of JBH using the discounted abnormal earnings model if analysts forecast the company, abnormal earnings will grow at 5% pa constantly beyond the forecast horizon, assume that JBH's cost of equity is 15%? (rounding up numbers to 2 decimal places, and showing the workings of calculations) 2018A 2019F 2020F 2021F 254 303 257 859 Net profit 248 555 947 600 1 034 594 1 123 600 1 213 851 Question 2 What does the terminal value of abnormal earnings represent? Calculate the proportion of terminal value to total equity value in Question 1.

Answer 1

Answer 1:

Equity value = 1,790,459.09

Workings:

2019 2020 2021 Net Profit (NP 254,303.00 248,555.00 257,859.00 Beginnig Equity(BlE 947,600.00 1,034,594.00 1,123,600.00 Equity Charge (EC-BE * 15% 142,140.00 155,189.10 168,540.00 Residual Income(RI NP EC 106,415.00 99,113.90 89,319.00 Terminal value TV = (89319 * (1 +5%) / (15%-5% 937,849.50 PV factors (1/(1+15%)^Year 0.869565 0.756144 0.657516 Discounted residual Income 92,534.78 74,944.35 58,728.69 PV of RIs 226,207.82 PV of TV 616,651.27 PV of abonormal earnings 842,859.09 Current equity 947,600.00 Total Equity Value 1,790,459.09

Answer 2:

Terminal value represents present value of future abnormal earnings at the end of year 2021.

Proportion of terminal value to equity value = 616651.27 / 1790459.09 = 34.44%