Reading 49: Residual Income Valuation - LOS d, (Part 3) ～ black, income

cfaedu

1．The residual income approach is NOT appropriate when:

A)   expected free cash flows are negative for the foreseeable future.

B)   the clean surplus accounting relation is violated significantly.

C)   a firm does not pay dividends or the stream of payments is too volatile to be sufficiently predictable.

D)   uncertainty is high in forecasting terminal values using an alternative valuation approach like dividend or free cash flow discount models.

2.The residual income approach is appropriate when:

A)   expected free cash flows are negative for the foreseeable future.

B)   the clean surplus accounting relation is violated significantly.

C)   key determinants of residual income, like book value and ROE, are not predictable.

D)   a firm pays high dividends that are quite stable.

maxsimax

thanks

cfaedu

答案和详解如下：

1．The residual income approach is NOT appropriate when:

A)   expected free cash flows are negative for the foreseeable future.

B)   the clean surplus accounting relation is violated significantly.

C)   a firm does not pay dividends or the stream of payments is too volatile to be sufficiently predictable.

D)   uncertainty is high in forecasting terminal values using an alternative valuation approach like dividend or free cash flow discount models.

The correct answer was B)

The residual income approach is not appropriate when the clean surplus accounting relation is violated significantly. The other responses describe circumstances in which the approach is appropriate.

2.The residual income approach is appropriate when:

A)   expected free cash flows are negative for the foreseeable future.

B)   the clean surplus accounting relation is violated significantly.

C)   key determinants of residual income, like book value and ROE, are not predictable.

D)   a firm pays high dividends that are quite stable.

The correct answer was A)

The residual income approach is appropriate when expected free cash flows are negative for the foreseeable future. It is not appropriate when the clean surplus accounting relation is violated significantly or when key determinants of residual income, like book value and ROE, are not predictable. A firm that pays high dividends that are quite stable is also a poor candidate for the approach.