Booker,Inc.is a distributor of building supplies.Management for the company has developed the following forecasts of net income:

Management expects net income to grow at a rate of 7 percent per year after 2015 and the company's cost of equity capital is 14%.Management has set a dividend payout ratio equal to 25% of net income and plans to continue this policy.Booker's common shareholders' equity at January 1,2011 is $544,902.
Required:a.Using the residual income model,compute the value of Booker as of January 1,2011.
b.Using the dividend discount model,compute the value of Booker as of January 1,2011.

Question

Booker,Inc.is a distributor of building supplies.Management for the company has developed the following forecasts of net income:
  
Management expects net income to grow at a rate of 7 percent per year after 2015 and the company's cost of equity capital is 14%.Management has set a dividend payout ratio equal to 25% of net income and plans to continue this policy.Booker's common shareholders' equity at January 1,2011 is $544,902.
Required:a.Using the residual income model,compute the value of Booker as of January 1,2011.
b.Using the dividend discount model,compute the value of Booker as of January 1,2011.

Quizplus · Accepted Answer

The Answer of Booker,Inc.is a distributor of building supplies.Management for the company has developed the following forecasts of net income:
  
Management expects net income to grow at a rate of 7 percent per year after 2015 and the company's cost of equity capital is 14%.Management has set a dividend payout ratio equal to 25% of net income and plans to continue this policy.Booker's common shareholders' equity at January 1,2011 is $544,902.
Required:a.Using the residual income model,compute the value of Booker as of January 1,2011.
b.Using the dividend discount model,compute the value of Booker as of January 1,2011.