Question: As discussed in the chapter, abnormal earnings (AE) are AEt = Actual earningst - Required earningst which may be expressed as AEt = NOPATt -

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 capital, and BVt-1 is the book value of equity at t - 1.
Following are NOPAT, BVt-1, and capital for two firms.

Required:
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?

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Requirement 1 The abnormal earnings of the two firms for 20102014 appear below Company A 2010 2011 2012 2013 2014 NOPAT 66920 79632 83314 89920 92690 ... View full answer

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