Exam 13: Valuation: Earnings-Based Approaches

Assume that a firm had shareholders' equity on the balance sheet at a book value of $1,500 at the end of 2010.During 2011 the firm earns net income of $1,900,pays dividends to shareholders of $200,and issues new stock to raise $500 of capital.The book value of shareholders' equity at the end of 2011 is:

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: 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%. -What would be Jarrett's residual income in 2013?

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

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

The foundation for residual income valuation is the classical _____________________________________________.

Residual income valuation focuses on:

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:

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

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?

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

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.

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.

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

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.

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

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

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

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%. -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?