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Determining abnormal earnings-Some examples (LO 7-1) As discussed in the chapter, abnormal earnings (AE) are AEt=Xt(reBVt1) where Xt is the firm's net income, re is the cost of equity capital, and BVt1 is the book value of equity at time t1. Required: Solve the following problems: 1. If Xt is $5,000,re=15%, and BVt1 is $50,000, what is AEt ? 2. If Xt is $25,000,re=18%, and BVt1 is $125,000, what is AEt ? 3. Assume the firm in requirement 2 can increase Xt to $30,000 by instituting some cost-cutting measures. What is the new AEt ? 4. Assume the firm in requirement 2 can divest $25,000 of unproductive capital with Xt falling by only $2,000. What is the new AEt ? 5. Assume the firm in requirement 2 can add a new division at a cost of $40,000, which will increase Xt by $7,600 per year. Would adding the new division increase AEt ? 6. Assume the firm in requirement 1 can add a new division at a cost of $25,000, which will increase Xt by $3,500 per year. Would adding the new division increase AEt