Question #17
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 8
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
A use of the residual income (RI) valuation approach is:
Answer Choices:
A. providing a check of consistency between competing approaches like free cash flow of equity (FCFE) and dividend discount model (DDM)
B. deferring value more than in competing valuation approaches
C. providing more reliable estimates of terminal value
Explanation
A RI model can be used along with other models to assess the consistency of results. FCFE
and DDM models forecast future cash flows while RI models start with a balance sheet
measure of equity and add the present value of expected future RI.