Equity Valuation Using the Residual Income and Dividend Discount Models. Priority Contractors provides maintenance and cleaning services to various corporate clients in New York City. The firm has provided the following forecasts of comprehensive income for Year +1 to Year +5: Total common shareholders’ equity was $2,224,401 on January 1, Year +1. The firm does not expect to pay a dividend during the period of Year +1 to Year +5. The cost of equity capital is 12%. Required Compute the value of Priority Contractors on January 1, Year +1, using the residual income valuation model. The firm expects comprehensive income to grow 5% annually after Year +5.
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Equity Valuation Using the Residual Income and
Total common shareholders’ equity was $2,224,401 on January 1, Year +1. The firm does not expect to pay a dividend during the period of Year +1 to Year +5. The
Required
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Compute the value of Priority Contractors on January 1, Year +1, using the residual income valuation model. The firm expects comprehensive income to grow 5% annually after Year +5.
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