Why is residual income value-relevant

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Reference no: EM132072300

Question: Why is residual income value-relevant to common equity shareholders? If the firm borrows capital from a bank and invests it in assets that earn a return greater than the interest rate charged by the bank, what effect will that have on residual income for the firm? Why is it appropriate to use the required rate of return on equity capital (rather than the WACC) as the discount rate when using the residual income valuation approach?

Reference no: EM132072300

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