Q Chapter 23: Ex. 13-15 and 13-17 Read Chapter 14 - Market Based Valuation Approach 13.15 Computing Residual Income. Suppose the following hypothetical data represent total assets, book value, and market value of common shareholders’ equity (dollar amounts in millions) for three firms. Each of these firms, Southwest Airlines, Kroger, and Yum! Brands, operates in a different industry, but all of them operate in very competitive industries. Southwest Airlines is a U.S. domestic airline that provides low-cost point-to-point air transportation services. Kroger operates retail supermarkets across the United States. Yum! Brands operates and franchises quick-service restaurants, including KFC, Pizza Hut, Taco Bell, Long John Silver’s, and A&W All American Food restaurants. These data also include hypotheti-cal market betas for the three firms and analysts’ consensus forecasts of net income for Year þ1. For each firm, analysts expect other comprehensive income items for Year þ1to be zero, so Year þ1 net income and comprehensive income will be identical. Assume that the risk-free rate of return in the economy is 4.0% and the market risk premium is 5.0% (amounts in millions) Southwest Airlines Kroger Yum! Brands Total assets $14,308 $23,211 $ 7,242 Common equity: $ 4,953 $ 5,176 $1,139 Book value $ 7,490 $14,870 $15,950 Market value 1.10 0.35 1.04 Market equity beta $ 252 $1,263 $ 1,010 Analysts’ consensus forecasts of net income for Year þ1 REQUIRED a. Using the CAPM, compute the required rate of return on equity capital for each firm. b. Project required income for Year þ1 for each firm. c. Project residual income for Year þ1 for each firm. d. Rank the three firms using expected residual income for Year þ1 relative to book value of common equity. e. What do the different amounts of residual income imply about each firm? Do the pro-jected residual income amounts help explain the differences in market value of equity across these three firms? Explain.