Hey kbhuntani I made a mistake and asked the wrong question. The correction question is underlined and bolded below for B and C. I need this done by Tuesday hopefully that is enough time for you. I attached what you gave me so essentially B and C will have to be changed. Thank you! If it can't be done in this time frame thank you for your time anyway

Consider HES financial statements given below. Assume the Company?s beta is estimated to be 1.5, risk free rate 2%, and market risk premium 10%. Furthermore, assume the company has a long-term growth rate for 2% after the fifth year and net income, and comprehensive income will be identical.

What is the company's value using the following methods: a) Residual Income b) Free Cash Flow to Equity c) Free Cash Flows to the Company d) Analyze and explain which one of the above valuation methods provides a better and more realistic valuation.

Consider HES financial statements given below. Assume the Company's beta is estimated to be 1.5, risk free rate 2%, and market risk premium 10%. Furthermore, assume the company has a long-term growth rate for 2% after the fifth year and net income, and comprehensive income will be identical. What is the company's value using the following methods: a) Residual Income b) Free Cash Flow to Equity c) Free Cash Flows to the Company d) Analyze and explain which one of the above valuation methods provides a better and more realistic valuation. Revenues Cost of Sales Gross Profit Accounting Advertising & Promotion Bank Charges Compensation & Benefits Consulting Fees Insurance Lease - Facilities Legal & Professional Licenses & Fees Maintenance Miscellaneous Office supplies Security Telephone Utilities Website Income Statement Year 1 Year 2 Year 3 Year 4 Year 5 $1,976,000 $2,074,800 $2,178,540 $2,287,467 $2,401,840 1,213,659 1,274,342 1,338,059 1,404,962 1,475,210 $762,341 $800,458 $840,481 $882,505 $926,630 6,000 6,300 6,615 6,946 7,293 15,000 12,360 12,731 13,113 13,506 41,496 43,571 45,749 48,037 50,439 246,643 254,042 261,663 269,513 277,598 2,400 1,000 336,000 500 500 600 1,800 2,700 720 1,800 4,200 1,800 0 1,050 336,000 500 510 612 1,836 2,754 742 1,836 4,410 1,800 0 1,103 336,000 500 520 624 1,873 2,809 764 1,873 4,631 1,800 0 1,158 336,000 500 531 637 1,910 2,865 787 1,910 4,862 1,800 0 1,216 336,000 500 541 649 1,948 2,923 810 1,948 5,105 1,800 Total Operating Exp. 663,159 668,323 679,255 690,569 702,276 EBIDTA Depreciation Operating Profit Interest Expense Earnings Before Taxes Income Taxes Net Income $99,182 4,916 $94,266 43,199 $132,135 4,916 $127,219 40,274 $161,226 4,916 $156,310 37,059 $191,936 4,916 $187,020 33,524 $224,354 4,916 $219,438 29,639 51,067 86,945 119,251 153,496 189,799 17,873 $33,194 30,431 $56,514 41,738 $77,513 53,724 $99,772 66,429 $123,370 Balance sheets Begin Cash Inventory Prepaid Leases Total Current Assets Year 1 Year 2 Year 3 Year 4 Year 5 $33,150 425,000 28,000 $110,697 425,000 28,000 $210,697 424,781 28,000 $243,259 446,020 28,000 $293,834 $363,370 468,321 491,737 28,000 28,000 $486,150 $563,697 $663,478 $717,279 $790,155 $883,107 Fixed Assets Less: Depreciation Net Fixed Assets Total Assets 33,850 0 33,850 $520,000 33,850 4,916 28,934 $592,631 33,850 9,832 24,018 $687,496 33,850 14,747 19,103 $736,382 33,850 33,850 19,664 24,579 14,186 9,271 $804,341 $892,378 Accounts Payable Long Term Debt Total Liabilities Owner's Equity Paid-in Capital Retained Earnings Total Liabilities & Equity 0 468,000 468,000 68,908 438,529 507,437 139,654 406,133 545,787 146,637 370,522 517,159 153,968 331,377 485,345 161,667 288,346 450,013 52,000 0 52,000 33,194 52,000 89,709 52,000 167,223 52,000 266,996 52,000 390,365 $520,000 $592,631 $687,496 $736,382 $804,341 $892,378 Cash Flow Statements Year 1 Operating Profit Add: Depreciation Year 2 Year 3 Year 4 Year 5 $94,266 4,916 99,182 $127,219 4,916 132,135 $156,310 4,916 161,226 $187,020 4,916 191,936 $219,438 4,916 224,354 -68,908 -70,966 14,256 14,968 15,719 168,090 203,101 146,970 176,968 208,635 43,199 17,873 40,274 30,431 37,059 41,738 33,524 53,724 29,639 66,429 Working Capital Investment Cash From Operations Interest Expense Income Taxes Net Cash Before Debt Pmt Debt Payment Change in Cash 107,018 132,396 68,173 89,720 112,567 29,471 $77,547 32,396 $100,000 35,611 $32,562 39,145 $50,575 43,031 $69,536 Cash Reconciliation Beginning Cash $33,150 $110,697 $210,697 $243,259 $293,834 Change in Cash Ending Cash 77,547 $110,697 100,000 $210,697 32,562 $243,259 50,575 $293,834 69,536 $363,370 (a) SOLUTION ASSUMPTIONS 0 Total assets Equity ratio Debt ratio(liabilities/assets) Cost of debt $486,150 1 $563,697 2 $663,478 3 $717,279 4 $790,155 5 $883,107 $0.10 $0.90 0 14% 0 $0.14 $0.86 0.09 14.0% 35.0% $0.21 $0.79 0.09 14.0% 35.0% $0.30 $0.70 0.09 14.0% 35.0% $0.40 $0.60 0.09 14.0% 35.0% $0.50 $0.50 0.09 14.0% 35.0% 0 0 0 0 0 $94,266 $127,219 $156,310 $187,020 $219,438 $43,199 $51,067 $17,873 $33,194 $40,274 $86,945 $30,431 $56,514 $37,059 $119,251 $41,738 $77,513 $33,524 $153,496 $53,724 $99,772 $29,639 $189,799 $66,429 $123,370 cost of capital ( rCAPM) cost of capital r =rf+Ba(rm-rf) =2%+1.5(10-2) r= 14% Equity charge = total equity x cost of capital Year 1 Year 3 Year 4 Year 5 Equity capital Equity charge (cost of equity) Net income Less: Equity charge Residual income(RI) 52,000 85,194 11927.16 141,709 19839.26 219,223 30691.22 318,996 44659.44 442,365 61931.1 0 $33,194 $11,927 $21,267 $56,514 $19,839 $36,675 $77,513 $30,691 $46,822 $99,772 $44,659 $55,113 $123,370 $61,931 $61,439 Present value of RI @ WACC Book value, V at period t=0 0 19379.97557 30299.2462 34727.44986 36278.82636 35491.871 342,365 Add:PV of continuing residual income $82,695 TOTAL VALUE OF COMMON STOCK 581,238 VALUE OF THE COMPANY USING THE RESIDUAL INCOME MODEL $ 581, 695 WACC WACC= cost of equity*weight of equity + cost of debt*weight of debt Year 1 Year 2 Year 3 Year 4 Year 5 Equity 52000 85194 141709 219223 318996 Debt 438529 406133 370522 331377 288346 Total debt and equity 490529 491327 512231 550600 607342 weight of equity 11% 17% 28% 40% 53% weight of debt 89% 83% 72% 60% 47% cost of equity 14% 14% 14% 14% 14% cost of debt 9% 9% 9% 9% 9% WACC 10% 10% 10% 11% 12% Value of the company = book value + pv of RI RI- residual income RI=Net income-equity charge Persistence factor for continuing residual income=2% $2,074,800 $2,178,540 $2,287,467 $2,401,840 1,213,659 $762,341 1,274,342 $800,458 1,338,059 $840,481 1,404,962 $882,505 1,475,210 $926,630 6,000 15,000 41,496 246,643 2,400 1,000 336,000 500 500 600 1,800 2,700 720 1,800 6,300 12,360 43,571 254,042 0 1,050 336,000 500 510 612 1,836 2,754 742 1,836 6,615 12,731 45,749 261,663 0 1,103 336,000 500 520 624 1,873 2,809 764 1,873 6,946 13,113 48,037 269,513 0 1,158 336,000 500 531 637 1,910 2,865 787 1,910 7,293 13,506 50,439 277,598 0 1,216 336,000 500 541 649 1,948 2,923 810 1,948 Utilities 4,200 4,410 4,631 4,862 5,105 1,800 1,800 1,800 1,800 1,800 Total Operating Exp. 663,159 668,323 679,255 690,569 702,276 EBIDTA EBIT Less: Interest expense EBT Less: Income tax expense Net income Tax rate = tax expense / EBT $1,976,000 Website Tax rate Revenues Income Statement Year 2 $99,182 $132,135 $161,226 $191,936 $224,354 4,916 4,916 4,916 4,916 4,916 $94,266 43,199 51,067 17,873 $33,194 $127,219 40,274 86,945 30,431 $56,514 $156,310 37,059 119,251 41,738 $77,513 $187,020 33,524 153,496 53,724 $99,772 $219,438 29,639 189,799 66,429 $123,370 Year 2 Year 3 Year 4 Cost of Sales Gross Profit Accounting Advertising & Promotion Bank charges 2% Compensation & Benefits Consulting Fees Insurance Lease - Facilities Legal & Professional Licenses & Fees Maintenance Miscellaneous Office supplies Security Telephone Depreciation Operating Profit Interest Expense Earnings Before Taxes Income Taxes Net Income Balance sheets Begin Year 1 Year 5 Cash Inventory Prepaid Leases Total Current Assets $33,150 425,000 28,000 $486,150 $110,697 425,000 28,000 $563,697 $210,697 424,781 28,000 $663,478 $243,259 446,020 28,000 $717,279 $293,834 468,321 28,000 $790,155 $363,370 491,737 28,000 $883,107 Fixed Assets Less: Depreciation Net Fixed Assets Total Assets 33,850 0 33,850 $520,000 33,850 4,916 28,934 $592,631 33,850 9,832 24,018 $687,496 33,850 14,747 19,103 $736,382 33,850 19,664 14,186 $804,341 33,850 24,579 9,271 $892,378 0 468,000 468,000 68,908 438,529 507,437 139,654 406,133 545,787 146,637 370,522 517,159 153,968 331,377 485,345 161,667 288,346 450,013 52,000 0 $520,000 52,000 33,194 $592,631 52,000 89,709 $687,496 52,000 167,223 $736,382 52,000 266,996 $804,341 52,000 390,365 $892,378 Year 2 Year 3 Year 4 Year 5 Working Capital Investment Cash From Operations Interest Expense Income Taxes Net Cash Before Debt Pmt Debt Payment Change in Cash $94,266 4,916 99,182 -68,908 168,090 43,199 17,873 107,018 29,471 $77,547 $127,219 4,916 132,135 -70,966 203,101 40,274 30,431 132,396 32,396 $100,000 $156,310 4,916 161,226 14,256 146,970 37,059 41,738 68,173 35,611 $32,562 $187,020 4,916 191,936 14,968 176,968 33,524 53,724 89,720 39,145 $50,575 $219,438 4,916 224,354 15,719 208,635 29,639 66,429 112,567 43,031 $69,536 Cash Reconciliation Beginning Cash $33,150 $110,697 $210,697 $243,259 $293,834 Accounts Payable Long Term Debt Total Liabilities Owner's Equity Paid-in Capital Retained Earnings Total Liabilities & Equity Cash Flow Statements Year 1 Operating Profit Add: Depreciation Change in Cash Ending Cash 77,547 $110,697 100,000 $210,697 32,562 $243,259 50,575 $293,834 69,536 $363,370 (b) SOLUTION Year 1 Year 2 Year 3 Year 4 Year 5 $1,976,000 1,213,659 $762,341 $2,074,800 1,274,342 $800,458 $2,178,540 1,338,059 $840,481 $2,287,467 1,404,962 $882,505 $2,401,840 1,475,210 $926,630 less:Selling, general and administrative expenses 663,159 668,323 679,255 690,569 702,276 Earnings before interest, taxes, depr. & amort. (EBITDA) less:Depreciation $99,182 4,916 $132,135 4,916 $161,226 4,916 $191,936 4,916 $224,354 4,916 Earnings before Interest and taxes (EBIT) $94,266 $127,219 $156,310 $187,020 $219,438 Total revenue less:Cost of Goods Sold Gross profit Revenues Cost of Sales Gross Profit Income Statement Year 1 Year 2 Year 3 Year 4 Year 5 $1,976,000 $2,074,800 $2,178,540 $2,287,467 $2,401,840 Add :depreciation 41,738 53,724 66,429 $33,194 Net Operating Profit After-Tax (NOPAT) 30,431 $56,514 $77,513 $99,772 $123,370 $762,341 $800,458 $840,481 $882,505 $926,630 Accountin g 6,000 6,300 6,615 6,946 7,293 Advertisin g& Promotion 15,000 12,360 12,731 13,113 13,506 Bank Charges 41,496 43,571 45,749 48,037 50,439 246,643 254,042 261,663 269,513 277,598 2,400 0 0 0 0 1,000 1,050 1,103 1,158 1,216 336,000 336,000 336,000 336,000 336,000 500 500 500 500 500 500 510 520 531 541 600 612 624 637 649 1,800 1,836 1,873 1,910 1,948 2,700 2,754 2,809 2,865 2,923 720 742 764 787 810 1,800 4,200 1,800 1,836 4,410 1,800 1,873 4,631 1,800 1,910 4,862 1,800 1,948 5,105 1,800 663,159 668,323 679,255 690,569 702,276 $99,182 $132,135 $161,226 $191,936 $224,354 4,916 4,916 4,916 4,916 4,916 $94,266 $127,219 $156,310 $187,020 $219,438 43,199 40,274 37,059 33,524 29,639 51,067 86,945 119,251 153,496 189,799 17,873 30,431 41,738 53,724 66,429 $33,194 $56,514 $77,513 $99,772 $123,370 Compensat ion & Benefits 4,916 4,916 4,916 4,916 0 -70,966 0 14,256 0 14,968 0 15,719 $97,186 $122,564 $58,341 $79,888 $102,735 Consulting Fees Insurance Lease Facilities 154924.39467643 Legal & Professiona l Termina value Present Value of Free Cash Flows @ WACC 88563.3364338504 111402.5972665 52809.9220634 71958.51790087 230878.27774878 555612.651413381 Total Present Value of Company Operations $883,107 Plus Current Assets Total Market Value $1,438,720 Licenses & Fees Maintenan ce Miscellane ous Office supplies Security WACC WACC= cost of equity*weight of equity + cost of debt*weight of debt 52,000 85,194 141,709 219,223 318,996 438,529 406,133 370,522 331,377 288,346 EBIDTA Depreciati on Operating Profit Interest Expense Earnings Before Taxes Year 1 Total debt and equity 1,475,210 0 -68,908 Free Cash Flow Debt 1,404,962 4,916 less:Capital Expenditures less: New Net Working Capital Equity 1,338,059 Total Operating Exp. 17,873 1,274,342 Telephone Utilities Website Federal and State Income Taxes 1,213,659 Year 2 Year 3 Year 4 Year 5 490,529 491,327 512,231 550,600 607,342 weight of equity 11% 17% 28% 40% 53% weight of debt cost of equity cost of debt WACC 89% 14% 83% 14% # 10% 72% 14% # 10% 60% 14% # 11% 47% 14% ## 12% ### 10% Income Taxes Net Income Balance sheets Begin Cash Inventory Prepaid Leases Total Current Assets Fixed Assets Less: Depr eciation Net Fixed Assets Total Assets Accounts Payable Long Term Debt Total Liabilities Owner's Equity Paid-in Capital Year 1 Year 2 Year 3 Year 4 Year 5 $33,150 425,000 $110,697 425,000 $210,697 424,781 $243,259 446,020 $293,834 468,321 $363,370 491,737 28,000 28,000 28,000 28,000 28,000 28,000 $486,150 $563,697 $663,478 $717,279 $790,155 $883,107 33,850 33,850 33,850 33,850 33,850 33,850 0 4,916 9,832 14,747 19,664 24,579 33,850 28,934 24,018 19,103 14,186 9,271 $520,000 $592,631 $687,496 $736,382 $804,341 $892,378 0 68,908 139,654 146,637 153,968 161,667 468,000 438,529 406,133 370,522 331,377 288,346 468,000 507,437 545,787 517,159 485,345 450,013 52,000 52,000 52,000 52,000 52,000 52,000 Retained Earnings 0 33,194 89,709 167,223 266,996 390,365 Total Liabilities & Equity $520,000 $592,631 $687,496 $736,382 $804,341 $892,378 Cash Flow Statements Year 1 Year 2 Year 3 Year 4 Year 5 $94,266 $127,219 $156,310 $187,020 $219,438 4,916 4,916 4,916 4,916 4,916 99,182 132,135 161,226 191,936 224,354 Working Capital Investment -68,908 -70,966 14,256 14,968 15,719 Cash From Operations 168,090 203,101 146,970 176,968 208,635 43,199 40,274 37,059 33,524 29,639 17,873 30,431 41,738 53,724 66,429 107,018 132,396 68,173 89,720 112,567 29,471 32,396 35,611 39,145 43,031 $77,547 $100,000 $32,562 $50,575 $69,536 $33,150 $110,697 $210,697 $243,259 $293,834 77,547 100,000 32,562 50,575 69,536 $110,697 $210,697 $243,259 $293,834 $363,370 Operating Profit Add: Depr eciation Interest Expense Income Taxes Net Cash Before Debt Pmt Debt Payment Change in Cash Cash Reconciliat ion Beginning Cash Change in Cash Ending Cash c) If Owners decide to issue 1,000,000 common shares, how much would be the value for each share? (i) Residual Income approach value of a share = total market value/ no. of shares =$ 287,669/1,000,000 0.287669 value of a share = $ 0.29 (ii) Discounted cashflows value of a share = total market value/ no. of shares = $ 1,438,720/1,000,000 1.423141 value of a share = $1.42 d) Solution. (i) The residual income approach values the firm at $ 581, 695 while the free cash flows method value the firm at $ 1,438,720 The residual income approach shows the economic profit after deducting the cost of equity, which is the actual value created by the firm to the shareholders. While the free cashflows use a terminal value of cashflows in the model, the resudual income approach use the actual book value of the common stock at the time of o which is more realistic considering that cashflows are highly uncertain in future periods since it is not possible to assess with certainty the ability of the firm to earn the me of of valuation arn the cashflows