Briefly define "abnormal earnings" and describe the key features of the abnormal earnings approach to valuation.

Abnormal earnings is the difference between actual earnings for period t (X_t)and stockholders' required dollar return on invested capital at the beginning of the period (r × BV_{t - 1}).More specifically:abnormal earnings = actual earnings - required earnings = X_t - (r × BV_{t - 1}).Perhaps the most important aspect of the abnormal earnings model is that investors will pay a premium only for the stocks of firms that earn more than their cost of equity capital (i.e.,firms that earn positive abnormal earnings).Conversely,investors will pay less than book value for firms that earn negative abnormal earnings.As described in the text,the abnormal earnings valuation model is:Price of equity at time 0 = Book value of equity at time 0 + Present value of expected abnormal earnings in all future periods.Note that the discount rate applied to the future abnormal earnings is the cost of equity capital.