Assignment:
Priority Contractors provides maintenance and cleaning services to various corporate clients in New York City. The firm has provided the following forecasts of net income for Year +1 to Year +5:
Year +1: $478,246
Year +2: $491,882
Year +3: $485,568
Year +4: $515,533
Year +5: $554,198
Total common shareholders' equity was $2,224,401 on January 1, Year +1. The firm does not expect to pay a dividend during the period of Year +1 to Year +5. The cost of equity capital is 12 percent.
Required:
a. Compute the value of Priority Contractors on January 1, Year +1, using the residual income valuation model. The firm expects net income to grow 5 percent annually after Year +5.
b. Compute the value of Priority Contractors on January 1, Year +1, using the dividend discount model. The firm will pay its first dividend in Year +6.