8.17  Projections from the Model

Projecting Book Value of Owners Equity

Recall from the clean surplus relationship in accounting we can express the dynamic behavior of book value of shareholders equity over time as:

BVt1  = CIt1 +  BVt0  - dt1

That is, Book Value can be forecast by forecasting Comprehensive Income and dividends.

First, book value of equity for 2009 (time = 0) was: $16.881 per share.  We can compute the time 1 book value per share as:

BV2010 = 8.49 + 16.881 – 2.403 = 22.968

Similarly,

BV2011 = 9.288 + 22.968 – 2.6285 = 29.6275 and so on.

Growth Rate in Book Value

2010: 22.968/16.881 => 36.06%

2011:  29.6275/22.968 => 28.99%

2012:  36.9816/29.6275 => 24.82%

2013:  45.1027/36.9816 => 21.96%

2014:  54.0708/45.1027 => 19.88%

 Projecting Residual Income

First recall Residual Earnings is computed as:

Residual Income = Comprehensive Incomet -  Book Value of Equityt-1 * Cost of Equity Capital

From the above numbers it can be verified that:

Residual Income2010 =  7.0771 = 8.49 – 16.881 * 0.0837

Residual Income2011 =  7.3656 = 9.288 – 22.968 * 0.0837

Calculating Return on Common Equity (ROCE) Over Time

The return on common equity is defined as Comprehensive Income to Common Equity at time t divided by the Book value of Equity at time t-1.

ROCE2010 =  8.49/16.881 = 0.5029

ROCE2011 =  9.288/22.9683 = 0.4043