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.
In both cases use the half-year convention.

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.
In both cases use the half-year convention.

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.
In both cases use the half-year convention.