Question

Foodsco Incorporated (FI), a leading distributor of food products and materials to restaurants and other institutions, has a remarkably steady track record in terms of both return on equity and growth. At year-end 2007, FI had a book value of $30 per share. For the foreseeable future, the company is expected to achieve a ROE of 15 percent (on trailing book value) and to pay out one-third of its earnings in dividends. The required return is 12 percent. Forecast FI’s residual income for the year ending December 31, 2012.

Answer 1

To forecast Foodsco Incorporated's (FI) residual income for the year ending December 31, 2012, we need to calculate the expected book value of the company at the end of 2012 and then subtract the required return on equity from that value. The forecasted residual income for FI for the year ending December 31, 2012, is $4.41 per share.

Step-by-step explanation:

To forecast Foodsco Incorporated's (FI) residual income for the year ending December 31, 2012, we need to calculate the expected book value of the company at the end of 2012 and then subtract the required return on equity from that value. Here are the steps:

1. First, calculate the book value of FI at the end of 2007. It is given as $30 per share.
2. Use the return on equity (ROE) of 15% to calculate the growth rate of the company's book value. Divide the ROE by one minus the dividend payout ratio (which is one-third or 0.33) to get the growth rate. In this case, the growth rate would be 15% / (1 - 0.33) = 22.39%.
3. Apply the growth rate to the book value of FI at the end of 2007 to get the expected book value at the end of 2012. Multiply $30 by (1 + 0.2239) to get the expected book value of $36.72 per share.
4. Finally, calculate the residual income by subtracting the required return of 12% from the expected book value of $36.72. Multiply $36.72 by 0.12 to get $4.41.

Therefore, the forecasted residual income for FI for the year ending December 31, 2012, is $4.41 per share.