Management expects net income to grow

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Reference no: EM13902182

HES, Inc. is a distributor of medical supplies. Management for the company has developed the following forecasts of net income:

 Forecasted Year     Net Income
2016  $130,125
2017  $140,450
2018  $166,800
2019  $184,200
2020  $198,250

Management expects net income to grow at a rate of 5 percent per year after 2020 and the company's beta is 1.2. Management has set a dividend payout ratio equal to 20% of net income and plans to continue this policy. HES's common shareholders' equity at January 1, 2016 is $820,300. Assume the risk free rate is 2% and market risk premium 10%.

Required:
a. Using the residual income model, compute the value of HES as of January 1, 2016.
b. Using the dividend discount model, compute the value of HES as of January 1, 2016.

Reference no: EM13902182

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