As discussed in the chapter, abnormal earnings (AE) are

AE _t = X _t − (r _e × BV _t−1 )

where X _t is the firm’s net income, r _e is the cost of equity capital, and BV _t-1 is the book value of equity at t − 1.

Following are X _t , BV _t-1 , and r _e for two firms.

Company A	2013			2014			2015			2016			2017
X t	$	66,920		$	79,632		$	83,314		$	89,920		$	92,690
BV t− 1		478,000			504,000			541,000			562,000			598,000
r e		0.152			0.167			0.159			0.172			0.166

Company B	2013			2014			2015			2016			2017
X t	$	192,940		$	176,341		$	227,700		$	198,900		$	282,964
BV t−1		877,000			943,000			989,999			1,020,000			1,199,000
r e		0.188			0.179			0.183			0.175			0.186

Required:

Calculate each firm’s AE _t each year from 2013 to 2017. (Round your final answers to the nearest whole dollar. Negative abnormal earnings should be indicated with a minus sign.)

Which firm was better managed over the 2013–2017 period?

Which firm is likely to be the better stock investment in 2018 and beyond?