Question

In some industries, competitive dynamics eventually drive long-run projections of the future returns earned by the firm to an equilibrium level equal to the long-run expected cost of equity capital in the firm. At that point, a firm can be expected to earn ____________ residual income in the future. increasing. zero. decreasing. There is not enough information to answer this question.

Answer 1

Answer:Zero

Explanation:

Residual income is stated as the excess income part estimation that is left after calculation of all debts and expenses with firm or industry following minimum return of equity is paid.

According to the question,long run projections tend to produce zero residual income as it reaches to that particular point of equilibrium level towards the long period in amount of equity capital. Rather continuing growth rate should be chosen as it tends to produce increase or decrease in residual income.

Other options are incorrect because increasing residual income and decrease residual income cannot be expected from firm. There is appropriate amount of information present in question. Thus, the correct answer is zero.