(Solution) - Priority Contractors provides maintenance and cleaning services -(2025 Original AI-Free Solution)

Paper Details

Priority Contractors provides maintenance and cleaning services to various corporate clients in New York City. The firm has provided the following forecasts of net income for Year +1 to Year +5:
Year +1: $478,246
Year +2: $491,882
Year +3: $485,568
Year +4: $515,533
Year +5: $554,198

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 percent.

Required
a. Compute the value of Priority Contractors on January 1, Year +1, using the residual income valuation model. The firm expects net income to grow 5 percent annually after Year +5.
b. Compute the value of Priority Contractors on January 1, Year +1, using the dividend discount model. The firm will pay its first dividend in Year +6.