Question #51
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 26
Status: Unattempted
Question
The residual income approach is NOT appropriate when:
Answer Choices:
A. a firm does not pay dividends or the stream of payments is too volatile to be sufficiently predictable
B. expected free cash flows are negative for the foreseeable future
C. the clean surplus accounting relation is violated significantly
Explanation
The residual income approach is not appropriate when the clean surplus accounting
relation is violated significantly. Both remaining responses describe circumstances in
which the approach is appropriate.