Exam 13: Valuation: Earnings-Based Approaches

If an analyst expects a firm to generate net income each period exactly equal to required earnings,then the value of the firm will be

The residual income valuation model is a rigorous and straightforward valuation approach, but the analyst should be aware of all of the following implementation issues that will hinder its ability to measure firm value correctly except:

Explain required income.What does required income represent? How is required income conceptually analogous to interest expense?

Assume that a firm had shareholders' equity on the balance sheet at a book value of $1,600 at the end of 2010.During 2011 the firm earns net income of $1,300,pays dividends to shareholders of $600,and uses $300 to repurchase common shares.The book value of shareholders equity at the end of 2011 is:

Why is the weighted average cost of capital not used as the discount rate when computing residual income?

In some industries,competitive dynamics eventually drive long-run projections of the future returns earned by the firm to an equilibrium level equal to the long-run expected cost of equity capital in the firm.At that point,a firm can be expected to earn ____________ residual income in the future.

To measure a firm's economic performance and position in a given period,it makes sense to measure all of the following except:

Clean surplus accounting for most common stock transactions holds for shares accounted for at market value.An exception to this is:

Explain residual income.What does residual income represent? What does residual income measure?

If investors have invested $20,000 of common equity in a company and it is determined that the required earnings of the company are $$1,250 each period,then investors must expect to earn what return?

Which of the following is probably the least likely reason for acquirers to pay too much in an acquisition?

In many cases,using the residual income valuation model will result in a different value than either the dividend discount model and the free cash flow valuation methods.What are some reasons that the three valuation models would result in inconsistent valuations?

Over the life of a firm,the capital invested in the firm by the shareholders plus the income of the firm will reflect the ______________________________ to the shareholders.

What is the rationale for using expected earnings as a basis for valuations?

What are the three arguments economists provide against using earnings as a value-relevant attribute in valuation?

Investors have invested $30,000in common equity in a company.Given the risk inherent in the company,the investors expect to earn a 13percent return.In addition,the investors expect the company to return all income to investors in the form of dividends.The company earns $4,500 the first year.For this company determine the following:a.The company's required earnings b.The company's residual earnings

Economists sometimes argue that earnings are not a _________________________ attribute on which to base valuation.

Porter,Inc.is a distributor of electrical supplies.Management for the company has developed the following forecasts of net income: Fred King,CFO of Porter,Inc.,expects net income to grow at a rate of 9 percent per year after 2016 and the company's cost of equity capital is 15%.Management plans to pay out all income in dividends and plans to continue this policy into the future.Porter's common shareholders' equity at January 1,2011 is $100,000. Required: Using the resichul incame madel campute the value of Porter, Inc. as af January l, 2012. Use the half-year adjustument.

Which of the following would likely be the most useful when valuing a dot.com company?

__________________ means that net income includes all of the recognized elements of income of the firm for common equity shareholders and dividends include all direct capital transactions between the firm and the common equity shareholders.