Exam 13: Valuation: Earnings-Based Approaches

The appropriate discount rate for the residual income model is

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

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

Jones Corp. Use this information to answer the following questions: At the end of 2005 Jones Corp. developed the following forecasts of net income: Management believes that after 2010 Jones will grow at a rate of 7% each year. Total common shareholders' was $112,768 on December 31, 2005. Jones has not established a dividend and does not plan on paying dividends during 2006 to 2010, its cost of equity capital is 12%. What would be Jones' common shareholders' equity at the end of 2009?

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.

At the beginning of 2007 investors had invested $25,000 of common equity in Giants Corp.and expect to earn a return of 11% per year. In addition, investors expect Giant Corp. to pay out 100% of income in dividends each year. Forecasts of Giant's net income are as follows: 2007 - $3,500 2008 - $3,200 2009 - $2,900 2010 and beyond - $2,750 Using this information what is Giant's residual income valuation at the beginning of 2007?

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

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

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.

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

Jones Corp. Use this information to answer the following questions: At the end of 2005 Jones Corp. developed the following forecasts of net income: Management believes that after 2010 Jones will grow at a rate of 7% each year. Total common shareholders' was $112,768 on December 31, 2005. Jones has not established a dividend and does not plan on paying dividends during 2006 to 2010, its cost of equity capital is 12%. Compute the value of Jones Corp. on January 1, 2006, using the residual income valuation model. Use the half-year adjustment.

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

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

At the beginning of 2007 investors had invested $125,000 of common equity in Jets Corp.and expect to earn a return of 15% per year. In addition, investors expect Jets Corp. to pay out 100% of income in dividends each year. Forecasts of Jet's net income are as follows: 2007 - $41,000 2008 - $35,400 2009 - $33,200 2010 and beyond - $25,000 Using this information what is Jet's residual income valuation at the beginning of 2007?

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.

Residual income will be zero when

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