Question
Downey, Jr. is a distributor of Black Sabbath tee shirts. S. Joe Hanson, CFO of Downey, Jr., has developed the following forecasts of comprehensive income:
Downey, Jr. is a distributor of Black Sabbath tee shirts. S. Joe Hanson, CFO of Downey, Jr., has developed the following forecasts of comprehensive income:
| Year | Projected Comprehensive Income | Present Value Factors |
| 2024 | $17,450 | .9091 |
| 2025 | $22,500 | .8264 |
| 2026 | $26,000 | .7513 |
| 2027 | $21,000 | .6830 |
| 2028 | $18,500 | .6209 |
The company's cost of equity capital is 10%. Downey Jr.'s common shareholders' equity on January 1, 2024, is $100,000. Management intends to pay out all income in dividends every year. The company expects comprehensive income to grow at a rate of 4 percent per year in 2029 and beyond.
Using the residual income model, compute the value of Downey, Jr. as of January 1, 2024. Use the mid-year adjustment.
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Operations Management
Authors: William J Stevenson, Mehran Hojati
4th Canadian edition
978-1259270154, 1259270157, 978-0071091428
