This module focused on two different valuation models: the discounted cash flow (DCF) model and the residual operating income (ROPI) model. The models focus on free cash flows to the firm and on residual operating income, respectively. We stressed that these two models are theoretically equivalent.

a. What is the intuition for why these models are equivalent?

b. Some analysts focus on cash flows as they believe that companies manage earnings, which presumably makes earnings less relevant. Are earnings relevant? Explain.