Question #48
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 25
Status: Unattempted
Correct Answer: B
Question
In a single-stage residual income model for a firm with return on equity (ROE) greater than the required rate of return, which statement is least accurate?
Answer Choices:
A. The justified price-to-book value (P/
B. Market value will be greater than book value
C. Free cash flow to equity will be positive
Explanation
In a single-stage residual income model with ROE greater than the required rate of return,
justified P/B will be greater than one and market value will be greater than book. There is
no clear relationship with free cash flow to equity.