Reference no: EM132984577

Question - Assume you expect the company's income to be $2000 in the coming year and to except the 5% income growth rate (and beginning of year common equity to support it) is only expected for years 2 and 3. Then growth is expected to be zero and all income is expected to be distributed to shareholders for all future years. Assume the company is an all-equity firm; that is, all financing comes from stockholders and none comes from debtholders. In this case, the company's balance sheet has net operating assets (NOA) of $12 000, shareholders' equity of $12 000, and zero net financial obligations (zero net debt).

Required -

a. Compute residual income (i.e. abnormal earnings) for the next three years and verify that residual income is growing at a constant rate. What is that rate of growth?

b. Use the residual income (abnormal earnings) model to derive the value of the firm and the price per common share.