LOS c, (Part 3): Contrast the recognition of value in the residual income model to value recognition in other present value models.

Q1. In the residual income approach, value tends to be recognized:

A)   earlier than in other present value-based approaches.

B)   later than in other present value-based approaches.

C)   almost exclusively due to estimated terminal value.

Q2. In the residual income approach:

A)   value is recognized earlier than in other present value-based approaches.

B)   uncertainty concerning the estimated terminal value is low.

C)   value is predominately derived from expected terminal value.

LOS c, (Part 3): Contrast the recognition of value in the residual income model to value recognition in other present value models. fficeffice" />

Q1. In the residual income approach, value tends to be recognized:

A)   earlier than in other present value-based approaches.

B)   later than in other present value-based approaches.

C)   almost exclusively due to estimated terminal value.

Correct answer is A)

Value tends to be recognized earlier in the residual income approach than in other present value-based approaches. For instance, a large portion of the total present value of a stock estimated using either forecasted dividends or free cash flows comes from the expected terminal value. Yet, uncertainty about this forecast is usually the greatest of any of the predicted cash flows. Conversely, residual income valuation models usually are less sensitive to terminal value estimates

Q2. In the residual income approach:

A)   value is recognized earlier than in other present value-based approaches.

B)   uncertainty concerning the estimated terminal value is low.

C)   value is predominately derived from expected terminal value.

Correct answer is A)

Value tends to be recognized earlier in the residual income approach than in other present value-based approaches. For instance, a large portion of the total present value of a stock estimated using either forecasted dividends or free cash flows comes from the expected terminal value. Yet, uncertainty about this forecast is usually the greatest of any of the predicted cash flows. Conversely, residual income valuation models usually are less sensitive to terminal value estimates

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