EXERCISE 9–1 Following are financial statement information for Welmark Corporation as of Year 2 and Year 3.

WELMARK CORPORATION Year 2 Year 3 Sales growth......................................................................................... 8.50% 10.65%

Net profit margin (Net income/Sales) ................................................... 6.71% 8.22%

Net working capital turnover (Sales/Average net working capital)........ 8.98 9.33 Fixed asset turnover (Sales/Average fixed assets) ................................ 1.67 1.64 Total operating assets/Total equity....................................................... 1.96 2.01 Number of shares outstanding ............................................................. 1,737 1,737

($ thousands)

Sales..................................................................................................... $25,423 $28,131 Net income............................................................................................ 1,706 2,312 Net working capital............................................................................... 2,832 3,015 Fixed assets.......................................................................................... 15,232 17,136 Total operating assets .......................................................................... 18,064 20,151 Long-term liabilities ............................................................................. 8,832 10,132 Total stockholders’ equity ..................................................................... 9,232 10,019 Required:
Using the residual income model, prepare a valuation of the common stock of Welmark Corporation as of Year 3 under the following assumptions:

a. Forecast horizon of five years

b. Sales growth of 10.65% per year over the forecast horizon and 3.5% thereafter.

c. All financial ratios remain at Year 3 levels

d. Cost of equity capital is 12.5%