Exam 13: Valuation: Earnings-Based Approaches

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

The foundation for residual income valuation is the classical _____________________________________________.

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

Assume that a firm had shareholders' equity on the balance sheet at a book value of $1,600 at the end of 2005. During 2006 the firm earns net income of $1,300, pays dividends to shareholders of $600, and uses $300 to repurchase common shares. The book value of shareholders equity at the end of 2006 is:

What is the rationale for using expected earnings as a basis for valuations?

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?

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