The valuation method calculating pseudo dividends involves zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash.

Question

Quizplus · Accepted Answer

The valuation method calculating pseudo dividends, also known as residual income valuation, does not rely on explicitly forecasted dividends. Instead, it deducts a required rate of return from the net income or net operating profit after tax (NOPAT) to determine the residual income. This residual income is then adjusted by subtracting the cost of equity multiplied by the amount of surplus cash held on the balance sheet to arrive at the value of pseudo dividends. The adjustment to working capital may also be made to strip surplus cash.

The Valuation Method Calculating Pseudo Dividends Involves Zero Explicitly Forecasted