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Exam 13: Valuation: Earnings-Based Approaches

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Question 41

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

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Comprehensive income is reported within ...

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Question 42

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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 43

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Why is it appropriate to use the required rate of return on equity capital (rather than the weighted average cost of capital)as the discount rate in the residual income valuation approach?

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

Jarrett Corp. At the end of 2010 Jarrett Corp.developed the following forecasts of net income: $\begin{array}{lccc}& \text {Forecasted } \\ \text { Year: }& \text { Net Income} \\2011&\$20, 856\\2012&\$22,733\\2013&\$24,552\\2014&\$27,252\\2015&\$ 29.978\\\end{array}$ 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%. -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?

Jarrett Corp. At the end of 2010 Jarrett Corp.developed the following forecasts of net income: $\begin{array}{lccc}& \text {Forecasted } \\ \text { Year: }& \text { Net Income} \\2011&\$20, 856\\2012&\$22,733\\2013&\$24,552\\2014&\$27,252\\2015&\$ 29.978\\\end{array}$ 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%. -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?

Residual income valuation focuses on ____________________ as a periodic measure of shareholder wealth creation.