Question

At the beginning of its fiscal year 2019, an analyst made the following forecast for KMG, Inc. (in millions of dollars):

	2018	2019	2020	2021	2022	2023
EPS		3.50	3.20	2.78	2.25	1.71
DPS		1.65	1.55	1.15	1.05	1.12
BPS	8.75

Suppose these numbers were given to you at the end of 2018, as forecasts, when the book value per share was $8.75, as indicated and market price of the stock was $10.50 per share. Use a required return of 9 percent for calculations below. You have to fill in the table below to show your working process.

a. Calculate residual earnings (RE) and return of common equity (ROCE) for each year, 2019–2023.                                                                               

Answer 1

a). ROCE and residual earning is calculated in the table below. Please see the line items ROCE and residual earning per share.