Jarrett Corp.
At the end of 2010 Jarrett Corp.developed the following forecasts of net income:
$\begin{array}{lccc}
& \text {Forecasted } \
\text { Year: }& \text { Net Income} \
2011&\$20, 856\
2012&\$22,733\
2013&\$24,552\
2014&\$27,252\
2015&\$ 29.978\
\end{array}$

Management believes that after 2015 Jarrett will grow at a rate of 7% each year.Total common shareholders' equity was $112,768 on December 31, 2010.Jarrett has not established a dividend and does not plan to paying dividends during 2011 to 2015.Its cost of equity capital is 12%.
-What would be Jarrett's common shareholders' equity at the end of 2014?
A) $180,909
B) $208,161
C) $95,540
D) $112,768

Question

Jarrett Corp.
At the end of 2010 Jarrett Corp.developed the following forecasts of net income:
 $\begin{array}{lccc}
& \text {Forecasted } \
  \text { Year: }& \text { Net Income} \
2011&\$20, 856\
2012&\$22,733\
2013&\$24,552\
2014&\$27,252\
2015&\$ 29.978\
\end{array}$
 
Management believes that after 2015 Jarrett will grow at a rate of 7% each year.Total common shareholders' equity was $112,768 on December 31, 2010.Jarrett has not established a dividend and does not plan to paying dividends during 2011 to 2015.Its cost of equity capital is 12%.
-What would be Jarrett's common shareholders' equity at the end of 2014?
A) $180,909
B) $208,161
C) $95,540
D) $112,768

Quizplus · Accepted Answer

$\begin{array}{llllll}
&\text { Forecasted } & \text { Required } & \text { Residual } & \text { Present } & \text { Presen } \
\text { Year }&\text { Net Income } & \text { Income } & \text { Income } & \text { Value Factor } & \text { Value }\
2011 & \$ 20,856 & \$ 13,532 & \$ 7,324 & 0.89286 & \$ 6,539 \
2012 & \$ 22,733 & \$ 16,035 & \$ 6,698 & 0.79719 & \$ 5,340 \
2013 & \$ 24,552 & \$ 18,763 & \$ 5,789 & 0.71178 & \$ 4,120 \
2014 & \$ 27,252 & \$ 21,709 & \$ 5,543 & 0.63552 & \$ 3,523 \
2015 & \$ 29,978 & \$ 24,979 & \$ 4,998 & 0.56743 & \$ 2,836 \
&&&\text { PV Residual }&\text { Income }&\$ 22,358\
\end{array}$
$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$\text { PV of Continuing Value }$ 
 $\begin{array}{l}
\text { Change in comman shareholder's equay }\
\begin{array} { r r r r r } 
& \text { Start of year } & \text { Net Inenme } & \text { Dividend } & \text { End of Year } \
2011 & \$ 112,768 & \$ 20,856 & 0 & \$ 133,624 \
2012 & \$ 133,624 & \$ 22,733 & 0 & \$ 156,357 \
2013 & \$ 156,357 & \$ 24,552 & 0 & \$ 180,909 \
2014 & \$ 180,909 & \$ 27,252 & 0 & \$ 208,161 \
2015 & \$ 208,161 & \$ 29,978 & 0 & \$ 238,139 \
2016 & \$ 238,139 & \$ 32,076 & \$ 15,406 & \$ 254,808\
&&&\text { PLUTG }
\end{array}
\end{array}$ PLUG** - The amounts for net income and common shareholders' equity at the end of the year equal the 107 percent of the amounts for the preceding year.The dividend in year 11 is the plug to reconcile the change in common shareholders' equity.

Jarrett Corp Management Believes That After 2015 Jarrett Will Grow at a Following