Exam 13: Valuation: Earnings-Based Approaches

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

Dirty surplus items in U.S.GAAP typically arise from all of the following except:

At the beginning of 2012 investors had invested $25,000 of common equity in Grant Corp.and expect to earn a return of 11% per year.In addition,investors expect Grant Corp.to pay out 100% of income in dividends each year.Forecasts of Grant's net income are as follows: 2012 - $3,500 2013 - $3,200 2014 - $2,900 2015 and beyond - $2,750 Using this information what is Grant's residual income valuation at the beginning of 2012?

Why is it appropriate to use the required rate of return on equity capital (rather than the weighted average cost of capital)as the discount rate in the residual income valuation approach?

The two most popular discounted earnings models appear to be

Residual income will be zero when

The following data represent total assets,book value,and market value of common shareholders' equity for Amore,Infact,and Tickle.Amore manufactures and sells cosmetics.Infact develops and manufactures computer chips.Tickle operates a chain of general merchandise stores.In addition,these data include existing market betas for the three firms and analysts' consensus forecasts of net income for Year +1 Assume that for each firm,analysts expect other comprehensive income items for Year +1 to be zero; so Year +1 net income and comprehensive income will be identical. Assume that the risk-free rate of return in the economy is 4.5 percent and the market risk premium is 5.5 percent. Required a.Using the CAPM,compute the required rate of return on equity capital for each firm. b.Project required income for Year +1 for each firm. c.Project residual income for Year +1 for each firm. d.What do the different amounts of residual income imply about each firm? Do the projected residual income amounts help explain the differences in market value of equity across these three firms? Explain.

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

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

Investors have invested $25,000 in common equity in a company.Given the risk inherent in the company the investors expect to earn a 15 percent return.In addition,the investors expect the company to return all income to investors in the form of dividends.The company is forecasted to earn $4,000 the first year,$5,000 the second year,$4,500 the third year and $3,750 each year after the third year.For this company determine the company's residual income valuation

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:

Investors have invested $25,000 in common equity in a company.Given the risk inherent in the company,the investors expect to earn a 15 percent return.In addition,the investors expect the company to return all income to investors in the form of dividends.The company earns $4,000 the first year.For this company determine the following: a.The company's required earnings b.The company's residual earnings

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?

The appropriate discount rate for the residual income model is

Provide the intuition for the residual income valuation model.In addition,define residual income.

Residual income in a long-run steady-state growth period is referred to as:

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 equal to the ______________________________ of common shareholders' equity.

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

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%. Compute the value of Jarrett Corp.on January 1,2011,using the residual income valuation model.Use the half-year adjustment.

The ______________________________ valuation model uses expected future net income and the book value of common shareholders' equity as the basis for valuation.