Which of the Following Applies to the Clean Surplus Theory

question 57

Multiple Choice

Which of the following applies to the clean surplus theory?

• A)It is a theory that is applied to security valuation, but is not very attuned to accounting concepts and numbers.
• B)The theory values a firm's equity based on the beginning of the period book value plus the present value of expected future abnormal earnings.
• C)The theory considers a firm's abnormal earnings amount to be equal to its beginning of the period book value multiplied by the cost of equity capital.
• D)This theory does not tie in well with the FASB's concept of comprehensive income.

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Definitions:

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded, typically downward sloping to the right.

Corporate Hierarchy

A structure in corporations that defines the levels of authority, roles, and responsibilities from top management to lower-level employees.

Natural Monopoly

A natural monopoly occurs when a single firm can supply the entire market at a lower cost than could be achieved by multiple firms due to economies of scale.

Economies of Scale

The cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.