Final answer:
If a firm's net income is equal to required earnings each period, its value will be equal to the book value of common shareholders' equity because the rate of return to investors is met without any additional increase in equity.
Step-by-step explanation:
If an analyst expects a firm to generate net income each period exactly equal to required earnings, then the value of the firm will be exactly equal to the book value of common shareholders' equity. When a firm's net income matches the required earnings, shareholders' equity on the balance sheet would reflect the actual value of the firm to the investors. This is because the net income is being returned to the shareholders at the rate they require; there are no additional retained earnings that would increase the book value beyond what investors expect from the ownership of the firm.
The book value represents the net worth of the company as recorded on the balance sheet, which is the total assets minus the total liabilities. So, if the net income returned matches the expected return (required earnings), the company's market value—what investors are willing to pay for it—is likely to align with the book value, assuming all other market conditions are constant.
The concept of capital gain is a possible outcome for an investor if the market value of the stock increases beyond the purchase price. However, in this scenario, the question focuses on value creation through earnings matching the required rate, not through an increase in the stock price.