Morrissey Tool Company manufactures machine tools for other manufacturing firms. The firm is wholly owned by Kelsey
Question:
Year +1: $213,948
Year +2: $192,008
Year +3: $187,444
Year +4: $196,442
Year +5: $206,667
The accountant expects net income to grow 5 percent annually after Year +5. Kelsey withdraws 30 percent of net 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 percent 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?
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Related Book For
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
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