Question #47
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 24
Status: Unattempted
Correct Answer: A
Question
Assuming that the growth rate is less than the required rate of return (r), a decrease in initial book value will cause value in a residual income (RI) model to:
Answer Choices:
A. decrease
B. there is insufficient information to determine the effect on RI
C. increase
Explanation
A decrease (increase) in initial book value decreases (increases) value. This is revealed by
the RI valuation expression:
V0 = B0 + [(ROE – r) / (r – g)]B0