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