You estimate empirically the ERC of firm J as 0.38. Firm K is identical to firm J in terms of size, earning power, persistence of earnings, and risk. Unlike firm J, however, firm K includes a high- quality financial forecast in its MD& A. You estimate firm K’s ERC as 0.57. Which firm’s net income report appears to be more useful to investors? Explain. Does this mean that all firms should be required to prepare high- quality financial forecasts? Explain.
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