Kraft Corporation has the following forecasted net income Year 2011: $478,246 Management expects net income to grow at a rate of 6% per year from 2011 to 2015. The company's cost of equity capital is 10%. Management has set a dividend payout ratio equal to 30% of net income and plans to continue this policy. Kraft's common shareholders' equity at January 1, 2011 is $2,224,401, and the long-term growth rate after 2015 is 5%. Requirement: a. Compute the value of Kraft as of January 1, 2011. Use the residual income valuation model. The company pays dividend at the end of the year. b. Assume the current market price is $70, and there are 100,000 shares outstanding. Is Kraft currently overvalued or undervalued? c. Assume that after 2012, Kraft stops paying dividend, is the company overvalued or undervalued?
