Earnings-Based Valuation

Earnings-Based Valuation Student’s Name Institution Affiliation Course Name & Code Instructor’s Name Date Earnings-Based Valuation Question 1 Survival in the market is challenging for any business because it is under pressure from its profit margin since customers can choose the best alternative. In areas of fierce competition, companies may face the risk of losing market share and being exposed to overpricing and higher operating costs (Hutzschenreuter, Borchers, & Harhoff, 2020). Hence, companies of this ilk may have similar residual income. A higher equity cost causes the net revenues to fall due to the business risk anticipated in the residual income, which is the difference between net income and the equity charge. A company that benefits from a small competitive advantage over its competitors always sees an initial increase in residual income and might be able to record some profit later. Nevertheless, if the firm's competitive advantage is slowly eaten up by increasing competition or piracy, then the company's net income is anticipated to fall. In terms of revenues, they reduce while the equity remains fixed to the extent that the company's competitive position weakens (Kniivilä, n.d.). Furthermore, the same thing will happen to its value, which is one of the themes of the projected future residual. Question 2 The residual income of a company is the measure of the company's profit after deducting the equity capital. The positive residual income seen after that is a sign of the company's financial success, which leads to the ...