CH Problem 7-7 Determining abnormal earnings-Some examples (LO 7-1) As discussed in the chapter, abnormal earnings (AE) are AE X (rex BV+-1) where x is the firm's net income, re is the cost of equity capital, and BV+-1 is 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-1 is $50,000, what is AE? = 2. If x is $25,000, re=18%, and BV-1 is $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 Co search O Prev 3 of 6 Next > a