Quaker Oats Company
Refer to the financial statements of Quaker Oats
Company below. Prepare a forecasted income statement for Year 12 using the
following assumptions ($ millions):
1. Revenues are forecast to equal $6,000.
2. Cost of sales forecast uses the average percent
relation between cost of sales and sales for the three-year period ending June
30, Year 11.
3. Selling, general, and administrative expenses are
expected to increase by the same percent increase occurring from Year 10 to
Year 11.
4. Other expenses are predicted to be 8% higher than
in Year 11.
5. A $2 million loss (net of taxes) is expected from
disposal of net assets from discontinued operations.
6. Interest expense, net of interest capitalized and
interest income, is expected to increase by 6% due to increased financial
needs.
7. The effective tax rate is equal to that of Year
11.
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%.
