Choose the correct answers!

1.Required income is measured as

a. the difference between the comprehensive income and the reported income of the firm.

b. the difference between the comprehensive income and the required income ("normal earnings") of the firm.

c. reported comprehensive income.

d. the book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.

2.Residual income is measured as

a. reported comprehensive income.

b. the book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.

c. the difference between the comprehensive income and the required income ("normal earnings") of the firm.

d. the difference between the comprehensive income and the reported income of the firm.

3.Under the residual income valuation approach, the value of common equity is determined as

a. book value of common equity plus the present value of future comprehensive income.

b. book value of common equity plus the present value of expected future residual income.

c. book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.

d. book value of common equity plus the present value of future free cash flows to common equity shareholders.

4.If a firm's residual income for a particular year is negative, it indicates

a. the firm's shares are overpriced.

b. the firm generated comprehensive income that did not exceed the required income.

c. the firm has a higher than normal expected rate of return on common equity.

d. the firm reported a loss on the income statement.

5.If the firm borrows capital from a bank and invests it in assets that earn a return greater than the interest rate charged by the bank, what effect will that have on residual income for the firm?

a. Decrease

b. Increase

c. There is not enough information in order to make this determination.

d. No effect