Exam 13: Valuation: Earnings-Based Approaches

The two most popular discounted earnings models appear to be

The value of a share of common equity should equal the present value of the _____________________________________________ the shareholders will receive.

Clean surplus accounting means that net income includes all of the recognized elements of income for the firm for _____________________________________________.

What are the four components that make up dirty surplus accounting according to the FASB? .

At the beginning of 2012 investors had invested $125,000 of common equity in Jan Corp.and expect to earn a return of 15% per year.In addition,investors expect Jan Corp.to pay out 100% of income in dividends each year.Forecasts of Jan's net income are as follows: 2012 - $41,000 2013 - $35,400 2014 - $33,200 2015 and beyond - $25,000 Using this information what is Jan's residual income valuation at the beginning of 2012?

Jarrett Corp. At the end of 2010 Jarrett Corp. developed the following forecasts of net income: 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%. -Assume that a firm's book value at the beginning of the year is $17,800 and that the firm reports net income of $6,200.If the firm's book value at the end of the year is $20,000 what was the amount of dividends paid during the year?

Accounting earnings numbers provide a basis for valuation because earnings are the primary measure of ______________________________ produced by the accrual accounting system.

In theory,all three valuation models,when correctly implemented with internally consistent assumptions,will produce the same estimates of value.However,in practice,which of the following errors can result in different value estimates?

Jarrett Corp. At the end of 2010 Jarrett Corp. developed the following forecasts of net income: 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%. -What would be Jarrett's residual income in 2013?

Residual income will begreater than zero when

What is meant by the term clean surplus accounting?

Jarrett Corp. At the end of 2010 Jarrett Corp. developed the following forecasts of net income: 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%. -What would be Jarrett's common shareholders' equity at the end of 2014?

The required earnings of the firm equals the product of the required rate of return on common equity capital times the __________________________________________________ at the beginning of the period.

When debating the issue of whether to use free cash flows or earnings in a valuation model,economists sometimes argue that ____________________ can be subject to purposeful management by a firm and thus make them less useful.

Required earnings are the

Residual income valuation focuses on ____________________ as a periodic measure of shareholder wealth creation.

Over the life of the firm,the present value of ______________________________,______________________________,and ____________________ will be the same.

The residual income_____________________________ valuation model uses __________________ and the book value of common shareholders' equity as the basis for valuation.

Residual income valuation focuses on

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