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    The document provides financial statement information for Welmark Corporation for Years 2 and 3. It then presents a valuation of Welmark's common stock as of Year 3 using the residual income model. Key assumptions include a 5-year forecast horizon with 10.65% annual sales growth, a cost of equity of 12.5%, and financial ratios remaining at Year 3 levels. The model calculates residual income for each forecast year and the present value of the residual income stream to determine an equity value per share of $15.72.

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    The document provides financial statement information for Welmark Corporation for Years 2 and 3. It then presents a valuation of Welmark's common stock as of Year 3 using the residual income model. Key assumptions include a 5-year forecast horizon with 10.65% annual sales growth, a cost of equity of 12.5%, and financial ratios remaining at Year 3 levels. The model calculates residual income for each forecast year and the present value of the residual income stream to determine an equity value per share of $15.72.

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    The document provides financial statement information for Welmark Corporation for Years 2 and 3. It then presents a valuation of Welmark's common stock as of Year 3 using the residual income model. Key assumptions include a 5-year forecast horizon with 10.65% annual sales growth, a cost of equity of 12.5%, and financial ratios remaining at Year 3 levels. The model calculates residual income for each forecast year and the present value of the residual income stream to determine an equity value per share of $15.72.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    402 views3 pages

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    Uploaded by

    Kplm Steven
    The document provides financial statement information for Welmark Corporation for Years 2 and 3. It then presents a valuation of Welmark's common stock as of Year 3 using the residual income model. Key assumptions include a 5-year forecast horizon with 10.65% annual sales growth, a cost of equity of 12.5%, and financial ratios remaining at Year 3 levels. The model calculates residual income for each forecast year and the present value of the residual income stream to determine an equity value per share of $15.72.

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    Following are financial statement information for Welmark Corporation as of Year 2 and Year 3.

    .:.
    Required:
    Using the residual income model, prepare a valuation of the common stock of Welmark Corporation as of Year 3 under the following
    assumptions:
    a. Forecast horizon of five years.
    b. Sales growth of 10.65% per year over the forecast horizon and 3.5% thereafter.
    c. All financial ratios remain at Year 3 levels.
    d. Cost of equity capital is 12.5%.
    SOLUTION:

    Historical figures Forecast Horizon   Terminal Year


    Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 20x8 20x8
    Sales growth 8.50% 10.65% 10.65% 10.65% 10.65% 10.65% 10.65% 3.50%
    Net profit Margin (Net income/Sales) 6.71% 8.22% 8.22% 8.22% 8.22% 8.22% 8.22% 8.22%
    NWC turn (Sales/avg NWC) 8.98 9.33 9.33 9.33 9.33 9.33 9.33 9.33
    FA turn (Sales/avg FA) 1.67 1.64 1.64 1.64 1.64 1.64 1.64 1.64
    Total operating assets/Total equity 1.96 2.01 2.01 2.01 2.01 2.01 2.01 2.01
    Cost of equity   12.5%    
           
    ($ Thousands)        
    Sales 25,423 28,131 31,127 34,443 38,112 42,171 46,663 48,297
    Net income ($ Mil) 1,706 2,312 2,558 2,831 3,132 3,466 3,835 3,969
    Net working capital 2,832 3,015 3,336 3,692 4,085 4,520 5,001 5,176
    Fixed assets 15,232 17,136 18,961 20,981 23,216 25,689 28,425 29,420
    Total Operating assets 18,064 20,151 22,297 24,673 27,301 30,209 33,426 34,596
    L-T Liabilities 8,832 10,132 11,211 12,405 13,727 15,189 16,807 17,395
    Total Stockholder's Equity ($ Mil) 9,232 10,019 11,086 12,267 13,574 15,020 16,619 17,201
       
    Residual Income Computation      
    Net Income   2,558 2,831 3,132 3,466 3,835 3,969
    Beginning Equity   10,019 11,086 12,267 13,574 15,020 16,619
    Required Equity Return   12.5% 12.5% 12.5% 12.5% 12.5% 12.5%
    Expected Earnings   1,252 1,386 1,533 1,697 1,877 2,077
    Residual Income   1,306 1,445 1,599 1,769 1,958 1,892
    Discount factor 0.89 0.79 0.70 0.62 0.55  
         
    Present value of residual income   1,161 1,142 1,123 1,105 1,086  
    Cum PV residual income   1,161 2,303 3,425 4,530 5,616  
    Terminal value of abnormal earnings   11,665  
    Beg book value of equity   10,019  
    Value of equity - Abnormal Earnings   27,301  
    Common shares outstanding (mil)   1,737  
    per share   $15.72  

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