What is the companys value using the residual income

Reference no: EM13898000

Consider HES financial statements given below. Assume the Company's beta is estimated to be 1.5, risk free rate 2%, and market risk premium 10%. Furthermore, assume the company has a long-term growth rate for 2% after the fifth year and net income, and comprehensive income will be identical.

What is the company's value using the following methods:

a) Residual Income

b) Free Cash Flow to Equity

c) Free Cash Flows to the Company

d) Analyze and explain which one of the above valuation methods provides a better and more realistic valuation.

Income Statements	Year +1	Year +2	Year +3	Year +4	Year +5
Revenues	$1,976,000	$2,074,800	$2,178,540	$2,287,467	$2,401,840
Cost of Sales	1,213,659	1,274,342	1,338,059	1,404,962	1,475,210
Gross Profit	$762,341	$800,458	$840,481	$882,505	$926,630
Accounting	6,000	6,300	6,615	6,946	7,293
Advertising & Promotion	15,000	12,360	12,731	13,113	13,506
Bank Charges	41,496	43,571	45,749	48,037	50,439
Compensation & Benefits	246,643	254,042	261,663	269,513	277,598
Consulting Fees	2,400	0	0	0	0
Insurance	1,000	1,050	1,103	1,158	1,216
Lease - Facilities	336,000	336,000	336,000	336,000	336,000
Legal & Professional	500	500	500	500	500
Licenses & Fees	500	510	520	531	541
Maintenance	600	612	624	637	649
Miscellaneous	1,800	1,836	1,873	1,910	1,948
Office supplies	2,700	2,754	2,809	2,865	2,923
Security	720	742	764	787	810
Telephone	1,800	1,836	1,873	1,910	1,948
Utilities	4,200	4,410	4,631	4,862	5,105
Website	1,800	1,800	1,800	1,800	1,800
Total Operating Exp.	663,159	668,323	679,255	690,569	702,276
EBIDTA	$99,182	$132,135	$161,226	$191,936	$224,354
Depreciation	4,916	4,916	4,916	4,916	4,916
Operating Profit	$94,266	$127,219	$156,310	$187,020	$219,438
Interest Expense	43,199	40,274	37,059	33,524	29,639
Earnings Before Taxes	51,067	86,945	119,251	153,496	189,799
Income Taxes	17,873	30,431	41,738	53,724	66,429
Net Income	$33,194	$56,514	$77,513	$99,772	$123,370

Balance Sheets	Begin	Year +1	Year +2	Year +3	Year +4	Year +5
Cash	$33,150	$110,697	$210,697	$243,259	$293,834	$363,370
Inventory	425,000	425,000	424,781	446,020	468,321	491,737
Prepaid Leases	28,000	28,000	28,000	28,000	28,000	28,000
Total Current Assets	$486,150	$563,697	$663,478	$717,279	$790,155	$883,107
Fixed Assets	33,850	33,850	33,850	33,850	33,850	33,850
Less: Depreciation	0	4,916	9,832	14,747	19,664	24,579
Net Fixed Assets	33.85	28,934	24,018	19,103	14,186	9,271
Total Assets	$520,000	$592,631	$687,496	$736,382	$804,341	$892,378
Accounts Payable	0	68,908	139,654	146,637	153,968	161,667
Long Term Debt	468,000	438.529	406,133	370,522	331,377	288,346
Total Liabilities	468,000	507,437	545,787	517,159	485,345	450,013
Owner's Equity
Paid-in Capital	52	52,000	52,000	52,000	52	52,000
Retained Earnings	0	33,194	89,709	167,223	266.996	390,365
Total Liabilities & Equity	$520,000	$592,631	$687,496	$736,382	$804,341	$892,378

Reference no: EM13898000

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