When applying the RI model, can you capitalize negative residual income when determining instrinsic equity value? Just curious.
Say the company has postive earnings over the past five years (although negative RI) and the horizon seems unlikely to change much, can you just capitalize the negative RI and add that to book value?? I realize in this case they are slowly destroying book value and therefore theoretically capping those losses would result in zero equity value.
It’s a situation that wasn’t proffered in the text. Maybe this is an example of when RI is not the best valuation method.