CAS Exam 7 Spring 2012, Question 12

Study guide: Exam 7

Given the following financial information for an insurance company (in $000,000):

	Actual 2011	Projections 2012	2013	2014	2015	2016
Net Income	180	190	200	211	222	234
Beginning Equity	2,000	2,108	2,222	2,342	2,468	2,602
Ending Equity	2,108	2,222	2,342	2,468	2,602	2,742

The expected market return on equity for peer insurance companies is 10%.
The risk-free rate based on US Treasury bill rates is 2%.
The equity beta, based on peer companies, is 0.85.
The company's business plan contemplates a 60% plowback ratio.
CAPM is an appropriate model for determining the company's risk-adjusted discount rate.

Determine the value of this company as of December 31, 2011 based on the dividend discount model and the projections for 2012 through 2016.

Part a (3.5 points)

No current syllabus covers this question; it is kept for the record.