In the residual income model, ROE is considered a value driver because it is a component of stock price.

Question

Quizplus · Accepted Answer

ROE (return on equity) is considered a value driver in the residual income model because it is a measure of a company's profitability that directly affects its stock price. Higher ROE typically leads to a higher stock price, and lower ROE can depress the stock price. Therefore, ROE is an important factor to consider when evaluating a company's potential for creating residual income for investors.

In the Residual Income Model, ROE Is Considered a Value