Question

Arrett Corp. At the end of 2010, Jarrett Corp. developed the following forecasts of net income.

Year Forecasted Net Income
2011 $20,856
2012 $22,733
2013 $24,552
2014 $27,252
2015 $29,978
Management believes that after 2015 Jarrett will grow at a rate of 7% each year. Total common shareholders' equity was $112,768 on December 31, 2010. Jarrett has not established a dividend and does not plan to paying dividends during 2011 to 2015. Its cost of equity capital is 12%. What would be Jarrett's residual income in 2013?
a. $24,552
b. $18,763
c. $5,789
d. $5,200

Answer 1

Jarrett Corp.'s residual income in 2013 would be d. $5,200.

Step-by-step explanation:

To calculate Jarrett Corp.'s residual income in 2013, we need to determine the excess income generated by the company compared to its cost of equity capital. Residual income is calculated as follows:

Residual Income = Net Income - (Equity Capital * Cost of Equity Capital)

Using the provided forecasted net income for 2013 of $24,552 and the total common shareholders' equity of $112,768, we can calculate the residual income:

Residual Income = $24,552 - ($112,768 * 0.12) = $5,200

Therefore, Jarrett Corp.'s residual income in 2013 would be $5,200.