Required return on Equity: 15% ROE for next 3 years is 25% Company will trade at a premium of 10% over book value at the end of three years all earnings will be reinvested book value as of dec 31 2007 is $40 if an analyst forgets to include the continuing residual income after 2010 in their estimate but does everything else correctly, they will most likely underestimate the value of the company on december 31 2007 by: A. $56.50 B. $7.81 C. $5.13 D. $11.37
Underestimate by 5.13 C Premium over Book Value at t=3 is 7.8125 Discounted back 3 years at r=15% gives $5.13
^^ agree. thank god the dividend payout was 0. i hate these when they have dividends .always mess up the book values and RIs
you are both correct!