The residual income valuation model is a rigorous and straightforward valuation approach, but the analyst should be aware of all of the following implementation issues that will hinder its ability to measure firm value correctly except:
A) common stock transactions
B) portions of net income attributable to equity claimants other than common shareholders
C) dirty surplus accounting items
D) positive book value of equity

Question

Quizplus · Accepted Answer

The residual income valuation model is designed to handle positive book values of equity, so it will not hinder its ability to measure firm value correctly. However, it may be hindered by common stock transactions, portions of net income attributable to equity claimants other than common shareholders, and dirty surplus accounting items, as these may not accurately reflect the true economic value of the firm.

The Residual Income Valuation Model Is a Rigorous and Straightforward