Based on the following information on a hypothetical company, perform an equity evaluation using residual earnings (RE) model. You should also make an investment recommendation based on your work.
Current market price per share AU$ 18.00
Current P/B ratio 1.5
Company’s market beta 0.8
Australian average risk-free rate 2.5%
Australian average share market return 9%
Company’s sustainable long-term growth rate after 5 years 3%
Company’s cost of capital 8%
Company’s dividend payout ratio 40%
Forecasted ROCE for the next 5 years 15%, 14%, 13%, 12%, 11%