Question #43
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 23
Status: Unattempted
Correct Answer: A
Question
The residual income approach is appropriate when:
Answer Choices:
A. the clean surplus accounting relation is violated significantly
B. a firm pays high dividends that are quite stable
C. a firm does not pay dividends or the payments are too volatile to be sufficiently predictable
Explanation
The residual income approach is appropriate when a firm does not pay dividends or the
payments are too volatile to be sufficiently predictable. 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.