Does anyone know why this statement is not correct? ‘I also suggest using a residual income model because, unlike free cash flows, the accounting data used in residual income models may not require significant adjustments’ In my opinion, this is correct but according to CFAI it is not quite right. Comments?
residual income model is based on book values; book values will be messed up if the accounting “clean surplus” does not hold, therefore the statement is wrong because it MAY REQUIRE significant adjustments
And the clean surplus relationship does not hold when there are changes in equity (anything that affects OCI) that skip the NI statement.
True. I had not thought of that.