Having a doubt in question no 2.
Here the answer mention is C but effect of violation of clean surplus relation is that net income is not correct but BV is still correct. Pls help
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In this question, some expenses had been capitalised by company. we will expense them now in P&L A/C, which results in lowering of net income.
ROE = NI/book value at year start. Since net income falls down, ROE will decrease.
Book Value at year end = Book value at year start + Net income – Dividend. Since net income falls down, Book Value will decrease.
Intrinsic value = book value at year start + PV of all Residual incomes.
Residual income = NI – (book value at year start * Re). Since NI falls down, Residual income decreases and results in PV of all residual incomes to fall. And accordingly Intrinsic value will decrease.