you are required to perform valuation for HES Company as given below.

Show detail work and discuss any assumptions you make.

Consider HES Company's 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

c) If Owners decide to issue 1,000,000 common shares, how much would be the value for each share?

d) Analyze and explain which one of the above valuation methods provides a better and more realistic valuation. Income Statement Year 1 Year 2 Year 3 Year 4 Year 5 Revenues $1,976,000 $2,074,800 $2,178,540 $2,287,467 $2,401,840 Cost of Sales 1,213,659 1,274,342 1,338,059 1,404,962 1,475,210 Gross Profit $762,341 $800,458 $840,481 $882,505 $926,630 Accounting 6,000 6,300 6,615 6,946 7,293 Advertising & Promotion 15,000 12,360 12,731 13,113 13,506 Bank Charges 41,496 43,571 45,749 48,037 50,439 Compensation & Benefits 246,643 254,042 261,663 269,513 277,598 Consulting Fees 2,400 0 0 0 0 Insurance 1,000 1,050 1,103 1,158 1,216 Lease - Facilities 336,000 336,000 336,000 336,000 336,000 Legal & Professional 500 500 500 500 500 Licenses & Fees 500 510 520 531 541 Maintenance 600 612 624 637 649 Miscellaneous 1,800 1,836 1,873 1,910 1,948 Office supplies 2,700 2,754 2,809 2,865 2,923 Security 720 742 764 787 810 Telephone 1,800 1,836 1,873 1,910 1,948 Utilities 4,200 4,410 4,631 4,862 5,105 Website 1,800 1,800 1,800 1,800 1,800 Total Operating Exp. 663,159 668,323 679,255 690,569 702,276 EBIDTA $99,182 $132,135 $161,226 $191,936 $224,354 Depreciation 4,916 4,916 4,916 4,916 4,916 Operating Profit $94,266 $127,219 $156,310 $187,020 $219,438 Interest Expense 43,199 40,274 37,059 33,524 29,639 Earnings Before Taxes 51,067 86,945 119,251 153,496 189,799 Income Taxes 17,873 30,431 41,738 53,724 66,429 Net Income $33,194 $56,514 $77,513 $99,772 $123,370 Balance sheets Begin Year 1 Year 2 Year 3 Year 4 Year 5 Cash $33,150 $110,697 $210,697 $243,259 $293,834 $363,370 Inventory 425,000 425,000 424,781 446,020 468,321 491,737 Prepaid Leases 28,000 28,000 28,000 28,000 28,000 28,000 Total Current Assets $486,150 $563,697 $663,478 $717,279 $790,155 $883,107 Fixed Assets 33,850 33,850 33,850 33,850 33,850 33,850 Less:Depreciation 0 4,916 9,832 14,747 19,664 24,579 Net Fixed Assets 33,850 28,934 24,018 19,103 14,186 9,271 Total Assets $520,000 $592,631 $687,496 $736,382 $804,341 $892,378 Accounts Payable 0 68,908 139,654 146,637 153,968 161,667 Long Term Debt 468,000 438,529 406,133 370,522 331,377 288,346 Total Liabilities 468,000 507,437 545,787 517,159 485,345 450,013 Owner's Equity Paid-in Capital 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 Operating Profit $94,266 $127,219 $156,310 $187,020 $219,438 Add:Depreciation 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 Interest Expense 43,199 40,274 37,059 33,524 29,639 Income Taxes 17,873 30,431 41,738 53,724 66,429 Net Cash Before Debt Pmt 107,018 132,396 68,173 89,720 112,567 Debt Payment 29,471 32,396 35,611 39,145 43,031 Change in Cash $77,547 $100,000 $32,562 $50,575 $69,536 Cash Reconciliation Beginning Cash $33,150 $110,697 $210,697 $243,259 $293,834 Change in Cash 77,547 100,000 32,562 50,575 69,536 Ending Cash $110,697 $210,697 $243,259 $293,834 $363,370