Question 1

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

Accepted Answer

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

Question 2

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 3

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 common shareholders' equity at the end of 2014?

Accepted Answer

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

Question 4

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 5

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 6

If investors have invested $20,000 of common equity in a company and it is determined that the required earnings of the company are $$1,250 each period,then investors must expect to earn what return?

Accepted Answer

A)  the risk free rate 
B)  9% 
C)  6.25% 
D)  the market premium

Question 7

When debating the issue of whether to use free cash flows or earnings in a valuation model,economists sometimes argue that ____________________ can be subject to purposeful management by a firm and thus make them less useful.

Accepted Answer

The answer of When debating the issue of whether to...

Question 8

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 9

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:

Accepted Answer

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

Question 10

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 11

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 12

What are the three arguments economists provide against using earnings as a value-relevant attribute in valuation?

Accepted Answer

The answer of What are the three arguments economists provide...

Question 13

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 equal to the ______________________________ of common shareholders' equity.

Accepted Answer

The answer of If an analyst expects a firm to...

Question 14

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 15

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 16

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 capital...

Question 17

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 18

The foundation for residual income valuation is the classical _____________________________________________.

Accepted Answer

The answer of The foundation for residual income valuation is...

Question 19

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 20

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

Exam 13: Valuation: Earnings-Based Approaches