zephyranalyst

know that RI models assume "clean surplus relation" - from curriculum: "any acctg charges taken directly to equity accounts will cause clean surplus relation not to hold. Example: AFS securities.

RI model valuations recognize value earlier than DDM & FCF. DDM & FCF rely largely on terminal values which are highly uncertain (far in the future). RI model's inclusion of the known current value (book value) reduces forecast error.

Use RI models when:
- firms doesn't pay dividends -OR- dividend stream is too volatile
- expected FCF is negative
- terminal value forecast is highly uncertain.