Question #52
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 26
Status: Unattempted
Correct Answer: A
Question
A common assumption regarding continuing residual income (RI) is that RI:
Answer Choices:
A. declines to zero as return on equity (ROE) drops to the cost of equity over time
B. falls to the average industry level
C. manifests a generally increasing trend indefinitely
Explanation
It is common to assume that RI declines to zero as ROE drops to the cost of equity over
time. Other assumptions analysts may make include RI continues indefinitely at a positive
level or RI reflects a decline in ROE to a long-run average level.