Question #61
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 30
Status: Unattempted
Correct Answer: B
Question
Which of the following characteristics of a company would make it unsuitable for residual income valuation analysis?
Answer Choices:
A. Book-value estimates are not reliable
B. The forecast of terminal value is not reliable
C. Free cash flows are negative and likely to remain so for some time
Explanation
Residual income models can handle negative free cash flows and poor forecasts for
terminal value. However, poor book-value estimates render the statistic less useful.