A newly established company is investing 200 in a project that is expected to generate 20% rate of return (net earnings) on its beginning of period book value each year for the next five years. The firm does not plan to invest in other projects in the five-year period. The project is depreciated straight-line over the life of the investment.

Assume that the free cash flow equals paid dividends. The firm is 100 percent equity financed, and its cost of capital equals 15%.

Calculate the project's value using

a)the dividend discount model

b)the residual earnings model

c)the abnormal earnings growth model.

d)Compare the results from the three valuation models. Which gives you the highest equity value and which gives you the lowest? Discuss the following statement: "The residual earnings model cannot be applied if the clean surplus relation does not hold."