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Compute the value of Morrissey Tool Company

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Problem - Equity Valuation Using the Residual Income Model - Morrissey Tool Company manufactures machine tools for other manufacturing firms. The firm is wholly owned by Kelsey Morrissey. The firm's accountant developed the following long-term forecasts of comprehensive income:

Year +1: $213,948

Year +2: $192,008

Year +3: $187,444

Year +4: $196,442

Year +5: $206,667

The accountant expects comprehensive income to grow 5% annually after Year +5. Kelsey withdraws 30% of comprehensive income each year as a dividend. Total common shareholders' equity on January 1, Year +1, is $1,111,141. Kelsey expects to earn a rate of return on her invested equity capital of 12% each year.

REQUIRED -

a. Using the residual income valuation model, compute the value of Morrissey Tool Company as of January 1, Year +1.

b. What advice would you give Kelsey regarding her ownership of the firm?

Reference no: EM132903136

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