2024 – After careful financial statement analysis we obtain these predictions for Colin Technology Year Net Income

After careful financial statement analysis, we obtain these predictions for Colin Technology:

Year	Net Income	Beginning Book Value	Year	Net Income	Beginning Book Value
1	$1,034	$5,308	5	$1,278	$6,728
2	1,130	5,292	6	1,404	7,266
3	1,218	5,834	7	1,546	7,856
4	1,256	6,338

 

Colin Technology”s cost of equity capital is estimated at 13 percent.

Required:

a. Abnormal earnings are expected to be $0 per year after Year 7. Use the accounting-based equity valuation model to estimate Colin”s value at the beginning of Year 1.

b. Determine Colin”s PB ratio using the results in (a ). Colin”s actual market-based PB ratio is 1.95. What do you conclude from this PB comparison?

c. Determine Colin”s PE ratio using the results in (a ). Colin”s actual market-based PE ratio is 10. What do you conclude from this PE comparison?

d. If we expect Colin”s sales and profit margin to remain unchanged after Year 7 with a stable book value of $8,506, use the accounting-based equity valuation model to estimate Colin”s value at the beginning of Year 1.