Exam 13: Valuation: Earnings-Based Approaches

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?

Clean surplus accounting means that ____________________ include all direct capital transactions between the firm and the common equity shareholders.

__________________ 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.

Over sufficiently long periods,_________________________ equals free cash flows to common equity.

Booker,Inc.is a distributor of building supplies.Management for the company has developed the following forecasts of net income: Management expects net income to grow at a rate of 7 percent per year after 2015 and the company's cost of equity capital is 14%.Management has set a dividend payout ratio equal to 25% of net income and plans to continue this policy.Booker's common shareholders' equity at January 1,2011 is $544,902. Required: a.Using the residual income model,compute the value of Booker as of January 1,2011. b.Using the dividend discount model,compute the value of Booker as of January 1,2011. In both cases use the half-year convention.

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?

Required earnings are the

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

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

____________________ are the fundamental,value-relevant attribute of expected future returns.

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.

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?

Accounting principles make accrual accounting earnings closer to the firm's underlying economic performance in a given period than are _________________________.

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.

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

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

Accounting for the book value of common shareholders' equity in a firm can be expressed as follows: BV_t = BV_t-1 + ____________________ - D_t.

If investors have invested $25,000 of common equity in a company and it is determined that the required earnings of the company are $2,250 each period,then investors must expect to earn what return?

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?

______________________________ is the amount by which expected future earnings exceed the required earnings.