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NEW QUESTION: 1
De Jong continues her analysis of O'Connor. She is concerned that along with a dividend discount model approach she would also like to get a measure of the contribution that the key managers, Melanie and Arthur O'Connor, have made to the company's apparent ongoing success.
She considers using NOPAT and EVA to assess management performance. She believes that increasing invested capital to take advantage of projects with positive net present values increases both NOPAT and EVA.
However, De Jong decides to use residual income analysis instead. She provides the following justification for using the residual income model:
* The calculation of residual income depends primarily on readily available accounting data.
* The residual income model can be used even when cash flow is difficult to forecast.
* The residual income model does not depend on dividend payments or on positive free cash flows in the near future.
* The residual income model depends on the validity of the clean surplus relation.
She also considers the following assumptions about continuing residual income:
Assumption 1: Residual income is positive and continues at the same level year after year.
Assumption 2: As return on equity approaches the cost of equity, residual income tends to zero.
Assumption 3: Residual income growth declines overtime and eventually reaches zero.
De Jong gathers recent financial information data on O'Connor, as shown in Exhibit I.

De Jong has also determined that at the beginning of 2008, O'Connor had total capital of $324,000,000, of which $251,000,000 was debt and $73,000,000 was equity. The company's cost of debt before taxes is 7%
,and the cost of equity capital is 8%. The company has a tax rate of approximately 34%. Weighted average cost of capital is 5.4%. Net operating profit after tax (before any adjustments) is $28,517,640.
De Jong is interested in obtaining the market's assessment of the implied growth rate in residual income and notes that the book value per share for O'Connor at the beginning of 2009 was $4.29, and the current market price is $70. She forecasts the return on equity (ROE) for 2009 to be 11.84%.
De Jong discusses her analyses with a colleague, who makes the following general statements:
Statement 1: It is usually the case that value is recognized later in the residual income model than in the dividend discount model.
Statement 2: When the present value of expected future residual income is negative, the justified P/B based on fundamentals is less than one.
Are De Jong's justifications for using the residual income model correct?
A. Yes.
B. No, because the residual income model depends on positive free cash flows in the near future.
C. No, because the residual income model should be not be used when cash flows are difficult to forecast.
Answer: A
Explanation:
Explanation/Reference:
Explanation:
All of the justifications noted by De Jong are appropriate reasons to use the residual income model. (Study Session 12, LOS 43.m)

NEW QUESTION: 2

A. Network Policy and Access Services
B. Host Guardian Service
C. Network Controller
D. Remote Access
Answer: C

NEW QUESTION: 3
Click the Exhibit button.

During pre-deployment testing, you want to ensure that all FC paths are available to your host. You use the network interface modify -vserver SVM1 -lif LIF_top-0f -admin-state up command to correct the configuration shown in the exhibit.
What happens when using this command?
A. It creates a new LIF on SVM2 named up.
B. It changes the operational state from "down" to "up".
C. It creates a new LIF on SVM1 named LIF_top-0f.
D. It changes the administrative state from "down" to "up".
Answer: D

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