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:

What is meant by the term clean surplus accounting?

Over the life of a firm,the capital invested in the firm by the shareholders plus the income of the firm will reflect:

Assume that a firm had shareholders' equity on the balance sheet at a book value of $1,600 at the end of 2010.During 2011 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 2011 is:

Residual income valuation focuses on:

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

The two most popular discounted earnings models appear to be:

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

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

The appropriate discount rate for the residual income model is:

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' 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?

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

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

Where is comprehensive income reported and what is its relevancy to the computation of residual income?

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

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?

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

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

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

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: