Question

Required earnings are the:_______

a. adjusted net income multiplied by the required rate of return on common equity capital.
b. net income the analyst expects the firm to generate multiplied by the required rate of return on common equity capital.
c. the market value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.
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.

Answer 1

Step-by-step explanation:

Required earnings are the minimum amount of earnings to meet the cost of equity capital requirements.

required earnings = book value of equity capital×required rate of return on common capital.(or common capital).

multiplying by market value is not correct to find out the required earnings.(option a is false ).

net income is calculated from required earnings, so there is no need to multiply net income or adjusted net income with required rate of return on common equity capital. Hence, b and c both are wrong.

Hence option d that is the book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital, is correct.