Exam 13: Valuation: Earnings-Based Approaches

Early in a period in which sales were increasing at a modest rate and plan expansion and start-up costs were occurring at a rapid rate,a successful business would likely experience:

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

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

__________________ 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.

Required earnings are the:

Residual income is the:

Jarrett Corp. At the end of 2010 Jarrett Corp.developed the following forecasts of net income: Forecasted Year: Net Income 2011 \2 0,856 2012 \2 2,733 2013 \2 4,552 2014 \2 7,252 2015 \ 29.978 Management believes that after 2015 Jarrett will grow at a rate of 7% each year.Total common shareholders' equity 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.

Residual income will be greater than zero when:

The two most popular discounted earnings models appear to be:

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

If the firm competes in a very competitive,mature industry,what effect will competitive conditions have on residual income for the firm and others in the industry? Now suppose the firm holds a competitive advantage in an industry,but the advantage is not likely to be sustainable for more than a few years because of the potential for entry in the industry.As the firm's competitive advantage diminishes,what effect will that have on that firm's residual income?

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

Booker,Inc.is a distributor of building supplies.Management for the company has developed the following forecasts of net income: Forecasted Year: Net Income 2011 \ 111,432 2012 \ 131,490 2013 \ 150,473 2014 \ 178,379 2015 \ 199,784 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.

The residual income valuation approach assumes that accounting for net income and book value of shareholders' equity follows ________________________________________.

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

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

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

Jarrett Corp. At the end of 2010 Jarrett Corp.developed the following forecasts of net income: Forecasted Year: Net Income 2011 \2 0,856 2012 \2 2,733 2013 \2 4,552 2014 \2 7,252 2015 \ 29.978 Management believes that after 2015 Jarrett will grow at a rate of 7% each year.Total common shareholders' equity 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%. -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?

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

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.