CAS Exam 7 Spring 2015, Question 15
Study guide: Exam 7
Given the following forecasted information for a company ($000):
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| Beginning GAAP Equity | 100,000 | 105,000 | 107,000 |
| Net Income | 10,000 | 12,000 | 13,000 |
| Minimum Capital Requirement | 105,000 | 107,000 | 110,000 |
- Investors demand 8% return on equity.
Part a (1.25 points)
Assuming 3% growth in abnormal earnings in perpetuity, calculate the company value as of January 1, 2016.
Part b (0.5 points)
Assuming abnormal earnings grow 3% for 3 years beyond the forecast horizon, and then decrease to $0 for 2022 and all subsequent years, calculate the company value as of January 1, 2016.
Part c (0.5 points)
Discuss which of the two scenarios presented above is more realistic.
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