you tell me....

Which of the following assumptions is not commonly used to simplify the calculation of residual income? Continuing residual income is expected to: A) disappear immediately. B) decline gradually as ROE declines. C) decline to the market average. D) stay at the same level indefinitely.


after actually reading the question, i pick A.

A could pose a problem…

A If R.I. disappeared immediately, you would have no RI to use in the calculation. Value would equal book value.

C It’s not market average but long run avg level consistant with mature industry

oh it says NOT commonly used… RTFQ ilvino!!!

I’d say C because I think it declines to the industry average and not the market average.


If it is C, then answer this: Why would you use the Residual Income model to value a firm with NO residual income??

C, becuase I have schweser memorized

McLeod, you can have residual income this year but not in the future.

C, because declines to Mature idustry avg not economy avg or mkt avg.

I didn’t see “continuing” part of continuing residual income… So with A, the persistance factor would be zero. It is C

alright… C it is… what threw me off was the market average…i assumed it to be the long term industry average in this case… and then couldn’t find the right answer cause everything else seemed to be right too… 14 days…14 days…god…i ask you for the patience to get through these…argh!