Jarrett Corp Management Believes That After 2015 Jarrett Will Grow at a Developed

question 39

Multiple Choice

Jarrett Corp.
At the end of 2010 Jarrett Corp. developed the following forecasts of net income:
$\begin{array}{c}\begin{array}{l}\\\text { Year } \\2011 \\2012 \\2013 \\2014 \\2015 \end{array}\begin{array}{l}\text { Forecasted}\\\text { Net Income}\\\$ 20,856 \\\$ 22,733 \\\$ 24,552 \\\$ 27,252 \\\$ 29,978 \end{array}\end{array}$

Management believes that after 2015 Jarrett will grow at a rate of 7% each year. Total common shareholders' 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%.
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What would be Jarrett's residual income in 2013?

• A) $24,552
• B) $18,763
• C) $5,789
• D) $5,200

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Definitions:

EPS Growth Rate

The rate at which a company's earnings per share (EPS) has grown or is expected to grow over a specified period.

Rate of Return

The positive or negative financial outcome of an investment over a specific period, expressed in terms of a percentage of the cost of investment.

EPS

EPS stands for Earnings Per Share, a financial ratio that indicates the portion of a company's profit allocated to each outstanding share of common stock.

Marginal Tax Bracket

The tax rate that applies to the last dollar of the taxpayer's income, indicating additional taxes on future earnings.