Sophia is trying to value AALI.JK using residual income method. As of 21 Octo...
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Sophia is trying to value AALI.JK using residual income method. As of 21 October 2022, the share price for AALI.JK is IDR 8,750. Exhibit 1 shows Sophia’s projection.
Exhibit 1. Sophia’s Residual Income Projection
Before making the projection, Sophia has already calculated the cost of equity for AALI using the following variables :
Beta : 1.23
Risk-free rate : 4.75%
Equity Risk Premium : 6.12%
Sophia shows her valuation to her superordinate, Samuel. When Samuel knows that Sophia uses residual income, he asks Sophia whether the clean surplus relationship is fulfilled.Why should we make sure clean surplus relationship is fulfilled before doing residual income valuation?
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