13.18 Equity Valuation Using the Residual Income, Free Cash Flow, and Dividend Discount Models. Exhibit 13.6 presents selected hypothetical data from projected financial statements for Steak n Shake for Year +1 to Year +11. The amounts for Year +11 reflect a long-term growth assumption of 3%. The cost of equity capital is 9.34%. Assume net income and comprehensive income will be identical.

REQUIRED

a. Compute the value of Steak n Shake as of January 1, Year +1, using the residual income model.

b. Repeat Requirement a using the present value of expected free cash flows to the common equity shareholders.

c. Repeat Requirement a using the dividend discount model.

d. Identify the reasons for any differences in the valuations in Requirements a, b, and c.

e. Suppose the market value of Steak n Shake on January 1, Year +1, is $309.98 million. Based on your valuations in Requirements a, b, and c, what is your assessment of the market value of this firm?

Exhibit 13. Steak 'n Shake Selected Financial Information (amounts in millions; allow for rounding) Problem 13.18) Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 Year+7 Year +8 Year +9 Year +10 Year +11 Common equity, beginning of year 165.8 $1776 $192.0 $206.0 $227.7 24.5 25.8 276 29.6 318 34.2 368 39.5 53.9 57.0 58.7 (12.7) 114 (13.6) (10 120.8)27.) (32.9) (382 (374 (43.3(50.6 $2166 $234.2 $238.1 $2394 $255.8 $2695 Net income Dividends Common equity 1776 51920 206.0 $216.6 $227.7 $234.2 $238, 2394 $255.8 269.5 $2776 $ 454 $512$563 61.5$ 67.1$ 72.9 $ 789 $852 $856$924$ 732 (35.2) 41.1) (41.9 (42.7) 43.5 44.4 45 46.0 47.3 481) 22.1 Cash flow from operations Cash flow for investing Cash flow for long-tem debt (0.5)20 1.0 (2.0) _ Cash flow for dividends (12.7) 1114) (13.6)(19.0)(20.8 27.7 (32.9 1382) 374) (43.3) 50.6 0.9 1.0 0.5 Net change in cash (3.0) 07 0808 08 $ 0.8 $ 0.8 $1.0 Exhibit 13. Steak 'n Shake Selected Financial Information (amounts in millions; allow for rounding) Problem 13.18) Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 Year+7 Year +8 Year +9 Year +10 Year +11 Common equity, beginning of year 165.8 $1776 $192.0 $206.0 $227.7 24.5 25.8 276 29.6 318 34.2 368 39.5 53.9 57.0 58.7 (12.7) 114 (13.6) (10 120.8)27.) (32.9) (382 (374 (43.3(50.6 $2166 $234.2 $238.1 $2394 $255.8 $2695 Net income Dividends Common equity 1776 51920 206.0 $216.6 $227.7 $234.2 $238, 2394 $255.8 269.5 $2776 $ 454 $512$563 61.5$ 67.1$ 72.9 $ 789 $852 $856$924$ 732 (35.2) 41.1) (41.9 (42.7) 43.5 44.4 45 46.0 47.3 481) 22.1 Cash flow from operations Cash flow for investing Cash flow for long-tem debt (0.5)20 1.0 (2.0) _ Cash flow for dividends (12.7) 1114) (13.6)(19.0)(20.8 27.7 (32.9 1382) 374) (43.3) 50.6 0.9 1.0 0.5 Net change in cash (3.0) 07 0808 08 $ 0.8 $ 0.8 $1.0