Hello,
Just had a question where it says “If the company chooses to expense rather than capitalise an expenditure, will the residual income model overestimate the value of the company?” and then the answer was “Expensing will underestimate the value”
As the formula for residual income model is
BV + [(ROE-re)*BV / r - g]
I thought it didn’t really matter whether to expense it or capitalise it.
Could anyone please explain the logic in this?