As discussed in the chapter, abnormal earnings (AE) are
AEt = Actual earningst - Required earningst
which may be expressed as
AEt = NOPATt - (r x BVt-1)
where NOPAT is the firm’s net operating profit after taxes, r is the cost of equity capital, and BVt-1 is the book value of equity at t - 1.
Following are NOPAT, BVt-1, and cost of equity capital for two firms.
1. Calculate each firm’s AE each year from 2010 to 2014.
2. Which firm was better managed over the 2010–2014 period? Why?
3. Which firm is likely to be the better stock investment in 2015 and beyond? Why?