Question - Boston, Inc. is. a distritrutor of restaurant Supplies. Management for the company has developed the following forecasts of net income:
Forecasted Year Net Income
2017 $130,125
2018 $140,450
2019 $166,800
2020 $184,200
2021 $198,250
Management expects net income to grow at a rate of 3 percent per year after 2021 and the company's. beta is. 1.4. Management has set a dividend payout ratio equal to 30% of net income and plans to continue this. policy. Boston's common shareholders' equity at January 1, 2017 is $850,300. Assume the risk free rate is 2.5% and market risk premium 10%.
Required:
a. Using the residual income model, compute the value of Boston as of January 1, 2017.
b. Using the dividend discount model, compute the value of Boston as of January 1, 2017.