As discussed in the chapter, abnormal earnings (AE) are AEt = Xt (re à BVt1) where Xt is the firm's net income, re is the

As discussed in the chapter, abnormal earnings (AE) are
AEt = Xt ˆ’ (re × BVtˆ’1)
where Xt is the firm's net income, re is the cost of equity capital, and BVtˆ’1 is the book value of equity at t ˆ’ 1.
Following are Xt, BVtˆ’1, and re for two firms.

Required:
1. Calculate each firm's AEt each year from 2013 to 2017.
2. Which firm was better managed over the 2013-2017 period? Why?
3. Which firm is likely to be the better stock investment in 2018 and beyond? Why?

Company A 2013 2014 2015 2016 $ 89,920 562,000 2017 $66,920 478,000 0.152 $ 79,632 504,000 $ 83,314 541,000 $92,690 598,000 BV 0.167 0.159 0.172 0.166 Company B 2013 $192,940 877,000 0.188 2014 2015 2016 $176,341 943,000 $227,700 989,999 198,900 1,020,000 2017 $282,964 1,199,000 BV 0.179 0.183 0.175 0.186