At the beginning of 2012 investors had invested $25,000 of common equity in Grant Corp. and...

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?

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Expert Solution

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

For further clarrification Please comment

Please ThumbsUp ! Thank You.

jeff jeffy answered 1 year ago

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