Question #64
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 31
Status: Unattempted
Correct Answer: A
Question
Which of the following is the most appropriate tool to measure managerial effectiveness, goodwill impairment, and equity value?
Answer Choices:
A. Residual income
B. Free cash flow to the firm
C. Gordon growth model
Explanation
Residual income is commonly used to measure managerial effectiveness, goodwill
impairment and equity value. The Gordon Growth Model (GGM) would not be appropriate
in instances where the underlying assumptions (such as stable growth in perpetuity) do
not apply. Free cash flow to the firm and price to sales would often not be appropriate
tools to measure goodwill impairment.