If a firm can earn a return on net assets (common equity book value)that exceeds its cost of equity capital,it will generate positive abnormal earnings.

Question

Quizplus · Accepted Answer

If a firm's return on net assets (common equity book value) is higher than its cost of equity capital, it means that the firm is generating more earnings than what investors expect for the risk they are taking on. This difference between actual earnings and expected earnings is known as abnormal earnings and is considered positive when it is higher than zero. Therefore, if a firm can earn a return on net assets that exceeds its cost of equity capital, it will generate positive abnormal earnings.

If a Firm Can Earn a Return on Net Assets