Question 1

Assume that a firm had shareholders' equity on the balance sheet at a book value of $1,500 at the end of 2010.During 2011 the firm earns net income of $1,900,pays dividends to shareholders of $200,and issues new stock to raise $500 of capital.The book value of shareholders' equity at the end of 2011 is:

Accepted Answer

$1,500+1,900-200+500=$3,700

Question 2

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

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Question 3

Over the life of a firm,the capital invested in the firm by the shareholders plus the income of the firm will reflect:

Accepted Answer

The capital invested in the firm by shareholders plus the income of the firm reflects the value of the firm to shareholders. This includes the value of the assets, profits, and future growth potential. It does not necessarily reflect the dividend paying ability or free cash flows available to shareholders. It also may not directly relate to the value for debtholders, as debt obligations and repayment may be separate from shareholder value.

Question 4

Assume that a firm's book value at the beginning of the year is $17,800 and that the firm reports net income of $6,200.If the firm's book value at the end of the year is $20,000 what was the amount of dividends paid during the year?

Accepted Answer

$17,800 + $6,200 - $4,000 = $20,000

Question 5

The appropriate discount rate for the residual income model is:

Accepted Answer

The answer of The appropriate discount rate for the residual...

Question 6

Residual income valuation focuses on:

Accepted Answer

The answer of Residual income valuation focuses on:
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Question 7

Residual income is the:

Accepted Answer

Residual income is the amount of income that remains after subtracting the required rate of return on assets from the actual net income of a firm. It is the difference between the net income that the analyst expects the firm to generate and the required earnings of the firm.

Question 8

At the beginning of 2012 investors had invested $125,000 of common equity in Jan Corp.and expect to earn a return of 15% per year.In addition,investors expect Jan Corp.to pay out 100% of income in dividends each year.Forecasts of Jan's net income are as follows: 2012 - $41,000
2013 - $35,400
2014 - $33,200
2015 and beyond - $25,000
Using this information,what is Jan's residual income valuation at the beginning of 2012?

Accepted Answer

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Question 9

To measure a firm's economic performance and position in a given period,it makes sense to measure all of the following except:

Accepted Answer

The daily free cash flow published by the Wall Street Journal is not a reliable measure of a firm's economic performance and position in a given period as it only reflects a single day's activity and not the overall performance of the firm over a period of time. The other options, expenses incurred for resources consumed, a portion of long-lived resources consumed, and the cost of commitments made for retirement benefits are all relevant measures of a firm's economic performance and position in a given period.

Question 10

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 residual income in 2013?

Accepted Answer

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Question 11

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

$2,250 / $25,000 = 9%

Question 12

Residual income will be greater than zero when:

Accepted Answer

Residual income is calculated as the actual net income earned by the company minus the required rate of return on equity. If the company's expected future income is greater than the required level of earnings necessary to cover the cost of equity capital, then the residual income will be positive, indicating that the company is generating more income than is needed to satisfy its investors.

Question 13

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

$12,500 + $3,200 - $1,100

Question 14

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

11eaa0b8_3b44_4d76_80dc_2111158f4c40_TB2249_00 11eaa0b8_3b44_4d77_80dc_293f353828ff_TB2249_00 PLUG** - The amounts for net income and common shareholders' equity at the end of the year equal the 107 percent of the amounts for the preceding year.The dividend in year 11 is the plug to reconcile the change in common shareholders' equity.

Question 15

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

The answer of Assume that a firm had shareholders' equity...

Question 16

Required earnings are the:

Accepted Answer

The answer of Required earnings are the:
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Question 17

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

If an analyst expects a firm to generate net income each period exactly equal to required earnings, then the firm is expected to neither create nor destroy value beyond what is stated in its financial statements. This means that the value of the firm will be equal to the book value of common shareholders' equity, which is the amount of assets that would be left over for common shareholders if all liabilities were paid off.

Question 18

Residual income is:

Accepted Answer

The answer of Residual income is:
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Question 19

Residual income in a long-run steady-state growth period is referred to as:

Accepted Answer

The answer of Residual income in a long-run steady-state growth...

Question 20

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%.
-Compute the value of Jarrett Corp.on January 1,2011,using the residual income valuation model.Use the half-year adjustment.

Accepted Answer

11eaa0b8_3b44_2663_80dc_83270d81d103_TB2249_00 11eaa0b8_3b44_2664_80dc_033a268f24f7_TB2249_00 PLUG** - The amounts for net income and common shareholders' equity at the end of the year equal the 107 percent of the amounts for the preceding year.The dividend in year 11 is the plug to reconcile the change in common shareholders' equity.

Quiz 13: Valuation: Earnings-Based Approaches