Chapter 5: Residual Income Valuation

LEARNING OUTCOMES After completing this chapter, you will be able to do the following: Calculate and interpret residual income and related measures (e.g., economic value added and market value added). Discuss the use of residual income models. Calculate future values of residual income given current book value, earnings growth estimates, and an assumed dividend payout ratio. Calculate the intrinsic value of a share of common stock using the residual income model. Discuss the fundamental determinants or drivers of residual income. Explain the relationship between residual income valuation and the justified price-to-book ratio based on forecasted fundamentals. Calculate and interpret the intrinsic value of a share of common stock using a single-stage (constant-growth) residual income model. Calculate an implied growth rate in residual income given the market price-to-book ratio and an estimate of the required rate of return on equity. Explain continuing residual income and list the common assumptions regard...