Question #29 - Reading 23 Residual Income Valuation

Reading: Reading 23 Residual Income Valuation

PDF File: Reading 23 Residual Income Valuation.pdf

Page: 18

Status: Correct

Correct Answer: B

Shared Context

- Calculate the total value of the common stock in Busicomb Inc. at 31 December 20x5 using the constant growth residual income valuation model. Work to the nearest $m. A) $836m. B) $579m. C) $708m.

Question

Jon is comparing the different equity valuation models. He believes that the residual income model offers some advantages to the analyst over the other models. Which of the following is an advantage of the residual income model?

Answer Choices:

A. It does not require the clean surplus relationship to hold

B. The intrinsic value is not dominated by the terminal value

C. No adjustments to the financial data is required

Explanation

The fact that the terminal value does not dominate the intrinsic value is a major advantage of the RI model.

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