1. In finance, there is a unresolved puzzle in which companies typically sets the internal hurdle rate to accept a project higher than its cost of equity capital. That is, a company with an equity cost of capital of, say, 8 percent typically has an internal hurdle rate set from 14 – 17 percent. Explain from a residual income framework whether such a company is turning down value creating projects.

2. Next, explain whether a residual earnings model is effective for companies with substantial amounts of assets not reflected in its book value. For example, Coca-Cola and its brand, Pfizer and its R&D, Berkshire Hathaway and its management know how.