Residual income model: advantage

Which of the following is the most appropriate description for residual income model?

A. The analyst need not adjust the book value of common equity for off-balance sheet items.
B. The analyst need not adjust the book value of common equity for non-recurring items.
C. The interest expense in the residual income model correctly captures the cost of debt capital.


B

While it is important to adjust income for non-recurring items, these adjustment do not need to be made to the book value because they are already reflected in the value of the assets.