Question #20
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 9
Status: Correct
Correct Answer: B
Question
The residual income approach is appropriate when:
Answer Choices:
A. a firm pays high dividends that are quite stable
B. the clean surplus accounting relation is violated significantly
C. expected free cash flows are negative for the foreseeable future
Explanation
The residual income approach is appropriate when expected free cash flows are negative
for the foreseeable future. It is not appropriate when the clean surplus accounting relation
is violated significantly. A firm that pays high dividends that are quite stable is also a poor
candidate for the approach.