A residual income model would be least appropriate as a tool to measure which of the following? A) Economic income. B) Managerial effectiveness. C) Operating leverage. D) Goodwill impairment.
D - just from process of elimination. I think the other 3 are valid uses of RI model
wow. really? D?
RI model is proposed as a method of Goodwill impairment, it’s also good for Economic Income (L2 … lol) and Management’s effectiveness to the rightful use of cash flow. So C?
I would guess C also.
I thought RI do have an effect on Operating Leverage measurement, though not directly.
Operating leverage = High fixed costs right? If you have high fixed costs, you have more invested capital which will affect you RI. I think D.
moregreat, do you have an answer? I am looking to call it a night.
your guess is right and Dinesh too. Operating leverage is not measured directly by residual income models, although operating leverage may have an effect on the residual income measured. Residual income models are intended as a measure of economic income, and are often used to measure managerial effectiveness and goodwill impairment.