Question

Kimberly-Clark Corp (KMB) reported a book value for its 568.6 million common shares of $5,650 million on December 31, 2002. Analysts are forecasting EPS of $3.36 for 2003 and $3.60 for 2004, and the indicated dividend per share is $1.36. Accepting these forecasts as valid, and using a required equity return of 9%, deal with the following.

Prepare a table of target prices at the end of 2002, based on the following forecasts:

• Residual earnings will remain constant after 2004

• Residual earnings will grow at 2% after 2004

• Residual earnings will grow at 4% after 2004

Answer 1

Answer

Particulars	2002	2003	2004
Earnings per share				3.36		3.6
Dividend per share				1.36		1.36
Book value per share	(5650 /568.6)	9.94	(9.94+3.36) -1.36	11.94	(11.94+3.6) - 1.36	14.18
Return on Capital Employed			( 3.36 /9.94) x 100%	33.8%	( 3.60 / 11. 94 ) x 100%	30.2%
Residual Earning			3.36 - (9.94 x 9%)	2.465	3.6 - ( 11. 94 x 9%)	2.525

Value calculation for 2005
Growth rate	Book value per share
0%	14.18	14.18 + (2.525 x 100%) / (9%- 0%)	42.24
2%	14.18	14.18 + (2.525 x 102%) / (9%- 2%)	50.97
4%	14.18	14.18 + (2.525 x 104%) / (9%- 4%)	66.71