This chapter builds on the previous chapter by providing the analyst another tool with which to value firm equity. We will discuss: How residual income is measured, how it is used in valuation, how it looks in real-world examples, how it compares with other valuation techniques, when it is most appropriate, how it depends on accounting data. | Residual Income Valuation: Valuing Common Equity Presenter Venue Date 1 This chapter builds on the previous chapter by providing the analyst another tool with which to value firm equity. The tool used here is residual income valuation. As with the free cash flow valuation covered in Chapter 4, residual income valuation is useful when the firm does not pay dividends. We will discuss How residual income is measured. How it is used in valuation. How it looks in real-world examples. How it compares with other valuation techniques. When it is most appropriate. How it depends on accounting data. DISCLAIMER: This presentation is NOT a substitute for the CFA Program curriculum. Candidates should not view this material as reflecting what will be required of them on the CFA exam. Residual Income LOS: Calculate and interpret residual income and related measures (., economic value added and market value added). Pages 209 – 213 As an economic concept, residual income has a long history, dating | Residual Income Valuation: Valuing Common Equity Presenter Venue Date 1 This chapter builds on the previous chapter by providing the analyst another tool with which to value firm equity. The tool used here is residual income valuation. As with the free cash flow valuation covered in Chapter 4, residual income valuation is useful when the firm does not pay dividends. We will discuss How residual income is measured. How it is used in valuation. How it looks in real-world examples. How it compares with other valuation techniques. When it is most appropriate. How it depends on accounting data. DISCLAIMER: This presentation is NOT a substitute for the CFA Program curriculum. Candidates should not view this material as reflecting what will be required of them on the CFA exam. Residual Income LOS: Calculate and interpret residual income and related measures (., economic value added and market value added). Pages 209 – 213 As an economic concept, residual income has a long history, dating back to Alfred Marshall in the late 1800s. More recently, residual income has received renewed attention, sometimes under the names Economic profit, Abnormal earnings, or Economic value added (EVA). The appeal of residual income models stemmed from a shortcoming of traditional accounting models which ignore a charge for the cost of equity capital. Text Integration Note: Residual income was introduced in Chapter 3 of the Equity Asset Valuation text. Residual Income LOS: Calculate and interpret residual income and related measures (., economic value added and market value added). Pages 209 – 213 In the traditional income statement, net income accounts for the cost of debt capital (in the interest expense) but does not account for the cost of equity capital. Residual income accounts for the cost of both debt and equity capital. The equity charge is also known as the cost of equity capital, and the required return on equity. Note that a firm could have positive net income but negative .
