Identify three economic and three accounting factors that will drive a firm’s price-earnings ratio in a given period to be higher than that of other firms in the same industry

The theory behind the residual income approach is that the value of common equity is determined by earnings and book value (Whalen, Baginski, & Bradshaw, 2018). The residual income value is relevant to common equity shareholders in that it values the common equity based upon the book value of the equity and the residual income a firm will make. The book value’s first role is to report the value of equity that the firm already invested (Whalen et al., 2018). The second role of book value is that it allows analysts to calculate the firm’s normal earnings. These two roles of book value help analysts to complete the valuation of residual income.

Timothy

References

Whalen, J., Baginski, S., & Bradshaw, M. (2018). Financial reporting, financial statement

analysis and valuation (9th ed.). [Adobe Digital Editions version]. Retrieved from

https://www.gcumedia.com/digital-resources/cengage/2018/financial-reporting-financial-

statement-analysis-and-valuation_9e.php

The theory behind the residual income approach is that the value of common equity is determined by earnings and book value (Whalen, Baginski, & Bradshaw, 2018). The residual income value is relevant to common equity shareholders in that it values the common equity based upon the book value of the equity and the residual income a firm will make. The book value’s first role is to report the value of equity that the firm already invested (Whalen et al., 2018). The second role of book value is that it allows analysts to calculate the firm’s normal earnings. These two roles of book value help analysts to complete the valuation of residual income.

Timothy

References

Whalen, J., Baginski, S., & Bradshaw, M. (2018). Financial reporting, financial statement

analysis and valuation (9th ed.). [Adobe Digital Editions version]. Retrieved from

https://www.gcumedia.com/digital-resources/cengage/2018/financial-reporting-financial-

statement-analysis-and-valuation_9e.php