Question 1

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

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Question 2

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.

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Question 3

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

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Question 4

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.

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Question 5

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).

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Question 6

What are the four components that make up dirty surplus accounting according to the FASB?
.

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Question 7

In many cases,using the residual income valuation model will result in a different value than either the dividend discount model or the free cash flow valuation methods.What are some reasons that the three valuation models would result in inconsistent valuations?

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Question 8

Clean surplus accounting means that net income includes all of the recognized elements of income for the firm for _____________________________________________.

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Question 9

Investors have invested $30,000in common equity in a company.Given the risk inherent in the company,the investors expect to earn a 13percent return.In addition,the investors expect the company to return all income to investors in the form of dividends.The company earns $4,500 the first year.For this company determine the following:
a.The company's required earnings
b.The company's residual earnings

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Question 10

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 the company to return all income to investors in the form of dividends.The company is forecasted to earn $4,000 the first year,$5,000 the second year,$4,500 the third year and $3,750 each year after the third year.For this company determine the company's residual income valuation

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Question 11

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

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Question 12

Accounting for the residual income in a firm with 100% dividend payout can be expressed as follows:
RIt = CIt- ____________________ X BVt??

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Question 13

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

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Question 14

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

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Question 15

Over sufficiently long periods,_________________________ equals free cash flows to common equity.

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Question 16

What is meant by the term clean surplus accounting?

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Question 17

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

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Question 18

__________________ means that net income includes all of the recognized elements of income of the firm for common equity shareholders and dividends include all direct capital transactions between the firm and the common equity shareholders.

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Question 19

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

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Question 20

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

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Quiz 13: Valuation: Earnings-Based Approaches