Question #36 - Reading 23 Residual Income Valuation

Reading: Reading 23 Residual Income Valuation

PDF File: Reading 23 Residual Income Valuation.pdf

Page: 21

Status: Unattempted

Correct Answer: B

Shared Context

- Regarding their statements about the forecast error in residual income models and when they recognize value, who is correct? LaMarre Hofstedt A) Incorrect Incorrect B) Correct Correct C) Correct Incorrect

Question

Which of the following is least likely to characterize the difference between a residual income model and a FCFE model?

Answer Choices:

A. Terminal value represents a higher proportion of intrinsic value in a residual income model than in a dividend discount model (DDM)

B. A residual income model is applicable to a firm that does not have FCF

C. Inputs to a residual income model are more easily manipulated by management

Explanation

Terminal value represents a lower, not higher, proportion of intrinsic value in a residual income model than in other present value based approaches. A residual income model is applicable to a firm that does not have FCF and relies on accounting data that is generally easily found. However, the accounting data used in a residual income model are more easily manipulated by management than cash flow data.

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