As discussed in the chapter, abnormal earnings (AE) are AEt = Xt – (re × BVt-1) where Xt is the firm 1 answer below »
As discussed in the chapter, abnormal earnings (AE) are AEt = Xt − (re × BVt−1) where Xt is the firm s net income, re is the cost of equity capital, and BVt−1 is the book value of equity at t − 1. Following are Xt, BVt−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?
