Question 1

Required earnings are the:

Accepted Answer

A)   adjusted net income multiplied by the required rate of return on common equity capital.
B)   net income the analyst expects the firm to generate multiplied by the required rate of return on common equity capital.
C)   the market value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.
D)   the book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital. D

Question 2

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

Accepted Answer

expected future net income

Question 3

Residual income in a long-run steady-state growth period is referred to as:

Accepted Answer

A)   dynamic residual income
B)   realistic residual income
C)   continuing residual income
D)   equilibrium residual income C

Question 4

Assume that a firm's book value at the beginning of the year is $12,500 and that the firm reports net income of $3,200 and pays dividends of $1,100. What will the firm's book value at the end of the year?

Accepted Answer

A)   $2,100
B)   $15,700
C)   $14,600
D)   $16,800

Question 5

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

Accepted Answer

The answer of Residual income valuation focuses on ____________________ as...

Question 6

At the beginning of 2012 investors had invested $125,000 of common equity in Jan Corp. and expect to earn a return of 15% per year. In addition, investors expect Jan Corp. to pay out 100% of income in dividends each year. Forecasts of Jan's net income are as follows:
2012 - $41,000
2013 - $35,400
2014 - $33,200
2015 and beyond - $25,000
Using this information, what is Jan's residual income valuation at the beginning of 2012?

Accepted Answer

A)   $125,000
B)   $184,600
C)   $190,262
D)   -$190,262

Question 7

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?

Accepted Answer

A)   $4,000
B)   $8,800
C)   $2,200
D)   Insufficient information to determine

Question 8

What would be Jarrett's common shareholders' equity at the end of 2014?

Accepted Answer

A)   $180,909
B)   $208,161
C)   $95,540
D)   $112,768

Question 9

Clean surplus accounting for most common stock transactions holds for shares accounted for at market value. An exception to this is:

Accepted Answer

A)   issuance of common equity shares for employee stock options exercises.
B)   repurchase of common shares.
C)   issuance of common shares to new shareholders in public exchanges.
D)   None of these.

Question 10

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:

Accepted Answer

A)   exactly equal to the book value of common shareholders' equity.
B)   greater than the book value of common shareholders' equity.
C)   less than the book value of common shareholders' equity.
D)   exactly equal to working capital.

Question 11

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

Accepted Answer

The answer of Accounting principles make accrual accounting earnings closer...

Question 12

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

Accepted Answer

The answer of The residual income valuation approach assumes that...

Question 13

Residual income will be greater than zero when:

Accepted Answer

A)   the firm's reported net income exactly equals the required level of earnings necessary to cover the cost of equity capital.
B)   the firm's expected future income is greater than the required level of earnings necessary to cover the cost of equity capital.
C)   the firm's expected future income exactly equals the required level of earnings necessary to cover the cost of equity capital.
D)   the firm's expected future income is less than the required level of earnings necessary to cover the cost of equity capital.

Question 14

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

Accepted Answer

A)   Net asset value
B)   Dividend yield
C)   Discounted cash flow
D)   Price-earnings

Question 15

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.

Accepted Answer

The answer of Over the life of a firm, the...

Question 16

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:

Accepted Answer

A)   $2,000
B)   $400
C)   $3,800
D)   $2,600

Question 17

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

Accepted Answer

The answer of ______________________________ is the amount by which expected...

Question 18

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?

Accepted Answer

A)   $25,000
B)   $26,350
C)   $26,151
D)   $26,041

Question 19

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%.
Compute the value of Jarrett Corp . on January 1, 2011, using the residual income valuation model. Use the half-year adjustment.

Accepted Answer

A)   $112,768
B)   $185,329
C)   $195,540
D)   $133,624

Question 20

The two most popular discounted earnings models appear to be:

Accepted Answer

A)   free cash flow and dividend discount model.
B)   sales/market capitalization and price-earnings.
C)   discounted abnormal earnings and residual income.
D)   price-cash flow and dividend discount.

Exam 13: Valuation: Earnings-Based Approaches