Can a firm have negative residual income (i.e., abnormal earnings)? What does this mean? Suppose you are valuing a growing firm and you forecast that it will have negative abnormal earnings for the next five years. Can you use the abnormal earnings valuation approach when abnormal earnings are negative?
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Can a firm have negative residual income (i.e., abnormal earnings)? What does this mean? Suppose you are valuing a growing firm and you
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- Suppose a company increases the price of its product and demand hardly declines.which of the following will increase? A) profit margin B) return - on - equity C) taxes D) all the aboveIs it possible for a company to have high profitability but a low ROE? Select an answer: It is possible, considering the three components of the DuPont framework. The DuPont framework suggests that a company with high profitability will always have a low ROE. The DuPont framework suggests that a company with high profitability will always have a high ROE. it is not possible, because ROE is based on a company's profitability in the previous year.If the firm is in a very competitive, mature industry, what effect will the competitive conditions have on residual income for the firm and others in the industry? Now suppose the firm holds a competitive advantage in its industry, but the advantage is not likely to be sustainable for more than a few years. As the firm’s competitive advantage diminishes, what effect will that have on that firm’s residual income? and If a firm’s residual income for a particular year is positive, does that mean the firm was profitable? Explain. If a firm’s residual income for a particular year is negative, does that mean the firm necessarily reported a loss on the income statement? Explain. What does it mean when a firm’s residual income is zero?
- Can you identify a possible explanation for the company’s declining profits? If so, what is it?Which of the following is most likely true concerning the stability and trend of earnings? Question options: The stability and trend of earnings require at least five years of historical data to be meaningful. The stability and trend of earnings are key factors when calculating cost of sales. The stability and trend of earnings are not factored in the analysis of revenues. The stability and trend of earnings depend on the trend of a single industry.Which of the following statements is correct? A. If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm’s AFN to be negative. B. AFN is not always positive. C. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm’s actual AFN must, mathematically, exceed the previously calculated AFN. D. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio. E. Dividend policy does not affect the requirement for external funds based on the AFN equation.
- Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results. Required: 1. How can a company manage earnings by changing its depreciation method? Is this an effective technique to manage earnings? 2. How can a company manage earnings by changing the estimated useful lives of depreciable assets? Is this an effective technique to manage earnings? 3. Using a fictitious example and numbers you make up, describe in your own words how asset impairment losses could be used to manage earnings. How might that benefit the company?As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $1.68 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 20.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 4.00% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Dividends one year from now (D1) Horizon value (P₁) Intrinsic value of Portman's stock ValueAs companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company’s stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $1.92 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 12.00% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 2.40% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Value Dividends one year from now (D₁) Horizon value (Pˆ1P̂1) Intrinsic value of Portman’s stock The risk-free rate (rRFrRF) is 3.00%, the market risk…
- If you were an investor considering purchasing the stock of a company and you were concerned about the company's ability to produce income or operating success for a given period of time, which of the following trends would worry you most? O a decreasing inventory turnover ratio an increasing return on common stockholders' equity ratio O a decreasing return on assets ratio an increasing current ratioAs companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $2.40 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 20.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 4.00% per year. Term Value The risk-free rate (RF) is 5.00%, the market risk premium (RPM) is 6.00%, and Portman's beta is 1.70. Dividends one year from now (D1) Horizon value (P1) ☑ Intrinsic value of Portman's stock ་ Assuming that the market is in equilibrium, use the information just given to complete the…As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $2.40 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 20.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 4.00% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Dividends one year from now (D₁) Horizon value (P₁) Intrinsic value of Portman's stock The risk-free rate (TRF) IS 5.00%, the market risk premium (RPM) is 6.00 %, and Portman's beta is 1.30. What…