Question 1

Residual income valuation focuses on

Accepted Answer

A)  dividend-paying capacity in free-cash flows. 
B)  earnings as a periodic measure of shareholder wealth creation. 
C)  free cash flows as a periodic measure of shareholder wealth creation. 
D)  dividends as a periodic measure of shareholder wealth creation.

Question 2

Assume that a firm had shareholders' equity on the balance sheet at a book value of $1,200 at the end of 2010.During 2011 the firm earns net income of $900,pays dividends to shareholders of $400,and issues new stock to raise $250 of capital.The book value of shareholders equity at the end of 2011 is:

Accepted Answer

A)  $2,750 
B)  $250 
C)  $1,450 
D)  $1,950

Question 3

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.

Accepted Answer

The answer of The required earnings of the firm equals...

Question 4

Accounting earnings numbers provide a basis for valuation because earnings are the primary measure of ______________________________ produced by the accrual accounting system.

Accepted Answer

The answer of Accounting earnings numbers provide a basis for...

Question 5

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 6

Residual income is

Accepted Answer

A)  adjusted net income the firm reports. 
B)  the difference between the net income the analyst expects the firm to generate and the required earnings of the firm. 
C)  the difference between the net income the analyst expects the firm to generate and the reported earnings of the firm. 
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.

Question 7

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

Accepted Answer

The answer of Economists sometimes argue that earnings are not...

Question 8

Currently U.S.GAAP does not follow clean surplus accounting.What are the four dirty surplus items that do not flow through net income?

Accepted Answer

The answer of Currently U.S.GAAP does not follow clean surplus...

Question 9

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

Accepted Answer

A)  Increased profits and no change in financing requirements. 
B)  Decreased profits and increased financing requirements because of an increasing cash shortage. 
C)  Decreased profits and decreased financing requirements because of an increasing cash surplus. 
D)  Increased profits and increased financing requirements because of an increasing cash shortage.

Question 10

What is meant by the term clean surplus accounting?

Accepted Answer

The answer of What is meant by the term clean...

Question 11

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 12

Todd Corp.manufactures train components.On January 1,2011,management provided the following forecast of income for the next five years:
  Thomas' common shareholders' equity was $422,174 on January 1,2011.The firm does not expect to pay a dividend during the 2011-2015 period.Thomas' cost of equity capital is 11 percent.
Required:
Compute the value of Todd Company on January 1,2011,using the residual income valuation model and the half year convention.T.Harp,the CEO of Todd,expects net income to grow at a rate of 6 percent annually after 2015.

Accepted Answer

The answer of Todd Corp.manufactures train components.On January 1,2011,management provided...

Question 13

If the firm competes in a very competitive,mature industry,what effect will competitive conditions have on residual income for the firm and others in the industry? Now suppose the firm holds a competitive advantage in an industry,but the advantage is not likely to be sustainable for more than a few years because of the potential for entry in the industry.As the firm's competitive advantage diminishes,what effect will that have on that firm's residual income?

Accepted Answer

The answer of If the firm competes in a very...

Question 14

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.

Accepted Answer

A)  increasing. 
B)  zero. 
C)  decreasing. 
D)  There is not enough information to answer this question.

Question 15

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 that the company will reinvest all income in projects that will earn 16%.The company is forecasted to earn $6,000 the first year,$5,000 the second year,$5,500 the third year and $6,244 each year after the third year.For this company determine the company's residual income valuation (round all numbers to the nearest dollar).

Accepted Answer

The answer of Investors have invested $25,000 in common equity...

Question 16

Porter,Inc.is a distributor of electrical supplies.Management for the company has developed the following forecasts of net income:
  Fred King,CFO of Porter,Inc.,expects net income to grow at a rate of 9 percent per year after 2016 and the company's cost of equity capital is 15%.Management plans to pay out all income in dividends and plans to continue this policy into the future.Porter's common shareholders' equity at January 1,2011 is $100,000.
Required:
Using the residual income model,compute the value of Porter,Inc.as of January 1,2012.Use the half-year adjustment.

Accepted Answer

The answer of Porter,Inc.is a distributor of electrical supplies.Management for...

Question 17

Residual income is the

Accepted Answer

A)  difference between the net sales that the analyst expects the firm to generate and the required earnings of the firm. 
B)  difference between the net income that the analyst expects the firm to generate and the required earnings of the firm. 
C)  difference between the common stock that the analyst expects the firm to issue and the required earnings of the firm. 
D)  difference between the expenses that the analyst expects the firm to generate and the required earnings of the firm.

Question 18

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 19

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

Accepted Answer

The answer of Explain required income.What does required income represent?...

Question 20

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

Accepted Answer

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

Exam 13: Valuation: Earnings-Based Approaches