As discussed in the chapter, abnormal earnings (AE) are AE; = Xt - (re x BV-1)...

 

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As discussed in the chapter, abnormal earnings (AE) are AE; = Xt - (re x BV-1) where X+ is the firm's net income, re is the cost of equity capital, and BVt-1is the book value of equity at time t- 1. Required: Solve the following problems: (Negative amounts for any of your answers should be indicated by a minus sign.) 1. If X; is $5,000, re = 15%, and BVt-jis $50,000, what is AE;? 2. If X; is $25,000, re = 18%, and BVt-1is $125,000, what is AE? 3. Assume the firm in requirement 2 can increase X+to $30,000 by instituting some cost-cutting measures. What is the new AE? 4. Assume the firm in requirement 2 can divest $25,000 of unproductive capital with X, falling by only $2,000. What is the new AE;? 5. Assume the firm in requirement 2 can add a new division at a cost of $40,000, which will increase X; by $7,600 per year. Would adding the new division increase AE;? 6. Assume the firm in requirement 1 can add a new division at a cost of $25,000, which will increase X; by $3,500 per year. Would adding the new division increase AE;? 1. AEt 2. AEt 3. AEt 4. AEt 5. Would adding the new division increase AEt? 6. Would adding the new division increase AEt? As discussed in the chapter, abnormal earnings (AE) are AE; = Xt - (re x BV-1) where X+ is the firm's net income, re is the cost of equity capital, and BVt-1is the book value of equity at time t- 1. Required: Solve the following problems: (Negative amounts for any of your answers should be indicated by a minus sign.) 1. If X; is $5,000, re = 15%, and BVt-jis $50,000, what is AE;? 2. If X; is $25,000, re = 18%, and BVt-1is $125,000, what is AE? 3. Assume the firm in requirement 2 can increase X+to $30,000 by instituting some cost-cutting measures. What is the new AE? 4. Assume the firm in requirement 2 can divest $25,000 of unproductive capital with X, falling by only $2,000. What is the new AE;? 5. Assume the firm in requirement 2 can add a new division at a cost of $40,000, which will increase X; by $7,600 per year. Would adding the new division increase AE;? 6. Assume the firm in requirement 1 can add a new division at a cost of $25,000, which will increase X; by $3,500 per year. Would adding the new division increase AE;? 1. AEt 2. AEt 3. AEt 4. AEt 5. Would adding the new division increase AEt? 6. Would adding the new division increase AEt?

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Required solution is given below Ans 1 AE t X t r e B... View the full answer