I’m getting confused on some concepts here. The problem uses the following information. (I tried to make a table but I’m messing up the formatting.)

Year

0

1

2

3

4

Balance Sheet:

Assets

250,000

180,000

130,000

100,000

0

Liabilities

194,604

157,010

116,281

72,072

0

Net worth

55,396

22,990

13,719

27,928

0

Income Statements:

Sales

220,000

240,000

260,000

280,000

Variable cash expenses

60,000

70,000

80,000

90,000

Fixed cash expenses

10,000

10,000

10,000

10,000

Depreciation

70,000

50,000

30,000

100,000

EBIT

80,000

110,000

140,000

80,000

Interest expense

9,730

7,851

5,814

3,604

EBT

70,270

102,149

134,186

76,396

Taxes at 40%

28,108

40,860

53,674

30,559

Net income before salvage

42,162

61,290

80,512

45,838

After-tax salvage value

12,000

Net income

42,162

61,290

80,512

57,838

Cost of equity is 19%. Before tax cost of debt is 5%. WACC = 11%.

The two questions are

1. What is the value of equity at time 0 based on the residual income method? My solution was to calculate the NPV of residual income + book value at time 0 (55396). Is that correct? My result was 194604.

2. What is the value of the firm at time 0 calculated from the company’s cash flow? I calculated this using NPV of residual income + equity investment + debt investment = 139207+55396+194604 = 389207. Is that correct?