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发表于 2011-3-21 13:44 | 只看该作者

Reading 45: Residual Income Valuation-LOS k 习题精选

center, common, company, class, 2011
Session 12: Equity Investments: Valuation Models
Reading 45: Residual Income Valuation

LOS k: Justify the selection of the residual income model to value a company's common stock.

 

 

The residual income approach is appropriate when:

A)
 a firm pays high dividends that are quite stable.
B)
 expected free cash flows are negative for the foreseeable future.
C)
 the clean surplus accounting relation is violated significantly.

 

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. A firm that pays high dividends that are quite stable is also a poor candidate for the approach.

 

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土豆妮

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发表于 2011-3-21 13:44 | 只看该作者

The residual income approach is NOT appropriate when:

A)
 a firm does not pay dividends or the stream of payments is too volatile to be sufficiently predictable.
B)
 expected free cash flows are negative for the foreseeable future.
C)
 the clean surplus accounting relation is violated significantly.

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

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发表于 2011-3-21 13:44 | 只看该作者

Analyst Brett Melton, CFA, is looking at two companies. Happy Cow Dairies has volatile cash flows, and its free cash flow is often negative. The company pays no dividends. Glitter and Gold, a maker of girls’ clothing, has a fairly steady stream of earnings and cash flows but takes a lot of charges against equity. Is the residual income model suitable for valuing the two companies?

Happy Cow Dairies Glitter and Gold

A)
No Yes
B)
Yes No
C)
No No

Residual income models work for companies with no dividends and volatile or negative cash flows. They do not work, however, when the clean surplus relation does not hold, as is the case when companies take charges against equity.

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发表于 2011-3-21 13:44 | 只看该作者

Which of the following characteristics of a company would make it unsuitable for residual income valuation analysis?

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.

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.

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