As discussed in the chapter, abnormal earnings (AE) are AEt = Xt (re à BVt1) where Xt
Question:
AEt = Xt (re à BVt1)
where Xt is the firm's net income, re is the cost of equity capital, and BVt1 is the book value of equity at t 1.
Following are Xt, BVt1, 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?
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...
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Related Book For
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer
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