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:
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

Quizplus · Accepted Answer

If a firm is consistently able to generate net income exactly equal to its required earnings, then the firm is essentially achieving its full potential and there are no excess earnings to be capitalized into the firm's value. As a result, the value of the firm would be exactly equal to the book value of common shareholders' equity.

If an Analyst Expects a Firm to Generate Net Income