Question

Problem 6-29 Residual Income Model (LO3, CFA9)

Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to make your dog look glamorous. Below you will find selected information necessary to compute some valuation estimates for the firm. Assume the values provided are from year-end 2015. Also assume that the firm’s equity beta is 1.40, the risk-free rate is 2.10 percent, and the market risk premium is 6.2 percent.

Dividends per share	$	2.40
Return on equity		9.00	%
Book value per share	$	17.20

	Earnings			Cash Flow			Sales
2015 value per share	$	5.30		$	6.75		$	25.80
Average price multiple		13.40			9.51			2.48
Forecasted growth rate		13.54	%		11.56	%		7.52	%

The required return is 10.78 percent. Use the clean surplus relationship to calculate the share price for Beagle Beauties with the residual income model.

Answer 1

Use spreadsheet for the ease in computations. Enter values and formulas in the spreadsheet as shown in the image below.

The obtained result is provided below.