Which of the following is the most appropriate response Kim can make to his supervisor’s final question? (i.e. why he prefers the residual income model to other approaches.) The analyst need not adjust book value of common equity for off-balance-sheet items.
The interest expense in the residual income model correctly captures the cost of debt capital.
The analyst need not adjust the book value of common equity for non-recurring items.
Explanation: Although it is important to adjust income for non-recurring items, these adjustments do not need to be made to the book value because they are already reflected in the value of the assets.
Could someone please enlighten me as I don’t understand this.