Given a text T, and several options, according to the question posed in the text T to choose the most appropriate option from the options as the answer, please directly output the most appropriate option, do not need to output the explanation.

Elena Castovan is a junior analyst with Contralith Capital, a long-only equity investment manager. She has been asked to value three stocks on Contralith's watch list: Portous, Inc. (PTU), SSX Financial (SSX), and Tantechi Ltd. (TTCI).During their weekly meeting, Castovan and her supervisor, Ariana Beckworth, discuss characteristics of residual income (RI) models. Castovan tells Beckworth the following.Statement 1 The present value of the terminal value in RI models is often a larger portion of the total intrinsic value than it is in other DCF valuation models.Statement 2 The RI model's use of accounting income assumes that the cost of debt capital is appropriately reflected by interest expense.Statement 3 RI models cannot be readily applied to companies that do not have positive expected near-term free cash flows.Beckworth asks Castovan why an RI model may be more appropriate for valuing PTU than the dividend discount model or a free cash flow model. Castovan tells Beckworth that, over her five-year forecast horizon, she expects PTU to perform the following actions.Reason 1 Pay dividends that are unpredictableReason 2 Generate positive and fairly predictable free cash flowsReason 3 Report significant amounts of other comprehensive incomeAt the conclusion of their meeting, Beckworth asks Castovan to value SSX using RI models. Selected financial information on SSX is presented in Exhibit 1.
| Exhibit l.SSX Financial(SSX) Selected Financial Data |
| Total assets(mill ons) | e4，000.00 |
| Capital structure | 60%deb/40%equity |
| EBIT(millions) | 6700.00 |
| Tax rate | 35% |
| Re tumon equity(ROE) | 23.37% |
| Pretax cost of debt | 5.20% |
| Cost of equity | 15.00% |
| Market price per share | 448.80 |
| Price-to-book ratio | 2.10 |


Castovan's final assignment is to determine the intrinsic value of TTCI using both a single-stage and a multistage RI model. Selected data and assumptions for TTCI are presented in Exhibit 2.
| Exhibit 2.Tan tech i Ltd.(TTC I) Selected Financial Data |
| Book value per share | 专45.25 |
| Market price per share | e126.05 |
| Constant long-term ROE | 12.00% |
| Constant long-terme am ings growth rate | 4.50% |
| Cost of equity | 8.70% |


For the multistage model, Castovan forecasts TTCI's ROE to be higher than its long-term ROE for the first three years. Forecasted earnings per share and dividends per share for TTCI are presented in Exhibit 3. Starting in Year 4, Castovan forecasts TTCI's ROE to revert to the constant long-term ROE of 12% annually. The terminal value is based on an assumption that residual income per share will be constant from Year 3 into perpetuity.
| Exhibit 2.Tan tech i Ltd.(TTC I) Forecasts of Earning and Dividends |
| Year 1 | Year 2 | Year 3 |
| Eam ings per share(E) | 7.82 | 8.17 | 8.54 |
| Dividends per share(E) | 1.46 | 1.53 | 1.59 |
| Beck wor h questions Casto van's assump ion regarding the impliedpersistence factor |
| used n the mult stage RI valuation.She tells Casto van that she believes that a persistence |
| factor of 0.10is appropriate for TTC I. |


 
Which of Castovan's reasons best justifies the use of a residual income model to value PTU?
Option A:Reason 1
Option B:Reason 2
Option C:Reason 3

Answer: A