An investor begins a business with a $1,000 investment. The…
An investor begins a business with a $1,000 investment. The company has these results for the first two years: Income of $150 in the first year Pays out no dividends in the first year. Income of $150 in the second year Pays out the entire cumulative income of $300 as dividends, and returns the original $1,000 investment. The discount rate for this investment is 10 percent. The PV factors for 10% are: Required: What are the abnormal earnings for year 1? What are the abnormal earnings for year 2, keeping in mind that the book value at the beginning of year 2 is the original investment ($1,000) plus the income from year 1 ($150) minus the dividends paid in year 1, (zero) ? What is the PV of the two years of abnormal earnings? The total cash in the firm at the end of the year 2 is $1,300. As of the initial investment, what is the present value of the $1,300? Now, for the accounting. How is the present value of the $1,300 related to the present value of the abnormal earnings?