In: Finance
At the beginning of 2012 investors had invested $25,000 of
common equity in Grant Corp. and expect to earn a return of 11% per
year. In addition, investors expect Grant Corp. to pay out 100% of
income in dividends each year. Forecasts of Grant’s net income are
as follows:
2012 - $3,500
2013 - $3,200
2014 - $2,900
2015 and beyond - $2,750
Using this information, what is Grant’s residual income valuation
at the beginning of 2012?
Year | Income | Return on equity | Residual Income (Income- Return on equity) |
Present value of Residual Income discounted @11% |
|
1 | $ 3,500.00 | $ 2,750.00 | $ 750.00 | $ 675.68 | |
2 | $ 3,200.00 | $ 2,750.00 | $ 450.00 | $ 365.23 | |
3 | $ 2,900.00 | $ 2,750.00 | $ 150.00 | $ 109.68 | |
4 | $ 2,750.00 | $ 2,750.00 | $ - | $ - | |
$ 1,150.58 | |||||
$ 25,000.00 | |||||
$ 26,150.58 |
Grant’s residual income valuation will be $26,150.58
Year | Income | Return on equity | Residual Income | Present value of Residual Income |
1 | 3500 | =25000*11% | =B2-C2 | =D2/(1.11^A2) |
2 | 3200 | =25000*11% | =B3-C3 | =D3/(1.11^A3) |
3 | 2900 | =25000*11% | =B4-C4 | =D4/(1.11^A4) |
4 | 2750 | =25000*11% | =B5-C5 | =(D5/11%)/(1.11^A5) |
=SUM(E2:E5) | ||||
25000 | ||||
=E7+E6 |
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