1555:
1545:
617:
However, the RI-based approach is most appropriate when a firm is not paying dividends or exhibits an unpredictable dividend pattern, and / or when it has negative free cash flow many years out, but is expected to generate positive cash flow at some point in the future. Further, value is recognized
621:
At the same time, in addition to the accounting considerations mentioned above, the RI approach will not generally hold if there are expected changes in shares outstanding or if the firm plans to bring in "new" shareholders who derive a net benefit from their capital contributions.
591:
303:
618:
earlier under the RI approach, since a large part of the stock's intrinsic value is recognized immediately – current book value per share – and residual income valuations are thus less sensitive to terminal value.
91:, management must generate returns at least as great as this cost. Thus, although a company may report a profit on its income statement, it may actually be economically unprofitable; see
421:
959:
346:, and the below formulae are applied instead. (Note that the value will remain identical: the adjustment is a "telescoping" device). In the first step, analysts commonly employ the
87:
and accounting for the level of risk resulting. This rate of return is the cost of equity, and a formal equity cost must be subtracted from net income. Consequently, to create
319:
433:
344:
190:
166:
952:
63:
based approach, with similar logic and advantages. Residual Income valuation has its origins in
Edwards & Bell (1961), Peasnell (1982), and Ohlson (1995).
945:
198:
887:
863:
706:
610:(DCF) valuation models), substituting future residual earnings for dividend (or free cash) payments (and the cost of equity for the
323:
634:
347:
1426:
867:
681:
611:
874:
625:
Although EVA is similar to residual income, there will be technical differences between EVA and RI, specifically
651:
360:
1339:
850:
842:
1584:
1485:
932:
915:
758:
807:
1579:
1279:
896:
1003:
1396:
112:
1359:
1530:
1515:
1344:
1159:
856:
1548:
1525:
1463:
1289:
1214:
1174:
1154:
919:
656:
351:
313:
116:
1259:
1249:
1219:
1189:
1129:
603:
72:
44:
586:{\displaystyle V_{0}=BV_{0}+\sum _{t=1}^{m-1}{RI_{t} \over (1+r)^{t}}+{T_{m} \over (1+r)^{m-1}}}
1500:
1401:
1264:
1102:
1072:
1416:
906:
626:
1438:
1433:
937:
910:
720:
Terminal Value
Techniques in Equity Valuation - Implications of the Steady State Assumption
607:
96:
56:
841:
Edwards, E. O. & Bell, P. W. (1961). "The Theory and
Measurement of Business Income",
8:
1388:
923:
1558:
1470:
1453:
1411:
1334:
1326:
1112:
1097:
972:
928:
719:
707:
Using the
Residual-Income Stock Price Valuation Model to Teach and Learn Ratio Analysis
329:
175:
151:
60:
1495:
733:
1490:
1475:
1406:
1349:
1294:
1269:
1239:
1229:
1139:
1122:
1043:
1038:
998:
993:
980:
968:
846:
141:
88:
1448:
1443:
1354:
1309:
1209:
1107:
1028:
1013:
988:
646:
84:
80:
40:
32:
1510:
1421:
1374:
1364:
1299:
1224:
1194:
1144:
1092:
1064:
1008:
875:
Some Formal
Connections Between Economic Values and Yields and Accounting Numbers
99:(DCF) approach may be negative here. RI-based valuation is therefore a valuable
92:
52:
100:
1458:
1369:
76:
36:
1573:
1077:
354:— although various, more formal approaches are also applied — which returns:
309:
169:
1316:
1164:
1149:
1023:
891:
903:
Three
Residual Income Valuation Methods and Discounted Cash Flow Valuation
298:{\displaystyle V_{0}=BV_{0}+\sum _{t=1}^{\infty }{RI_{t} \over (1+r)^{t}}}
172:
of its expected future residual income, discounted at the cost of equity,
83:– under the control of the firm's management, compensating them for their
51:(RI) is then the income generated by a firm after accounting for the true
1274:
1244:
1087:
1018:
877:". Journal of Business Finance and Accounting, Vol.9, No.3, PP. 361–381.
629:, originators of EVA, recommend a fairly large number of adjustments to
602:
As can be seen, the residual income valuation formula is similar to the
1520:
1480:
1284:
1234:
1204:
1082:
145:
95:. It is thus possible that a value deemed positive using a traditional
1254:
1117:
1304:
1199:
1184:
902:
859:. European Journal of Operational Research, 198(1) (October), 1−22.
857:"Splitting up value: A critical review of residual income theories"
722:. SSE/EFI Working Paper Series in Business Administration No 2000:7
119:
are also used. The currency charge to be subtracted is then simply
1134:
929:
A Tutorial on
Residual Income Valuation and Value Added Valuation
782:
661:
1033:
630:
967:
635:
Economic value added § Comparison with other approaches
709:. Issues in Accounting Education. Vol. 16, No. 2. May 2001
597:
864:"Earnings, Book Values and Dividends in Equity Valuation"
808:"EVA/Economic Profit Vs. Residual Income - AnalystForum"
436:
363:
332:
201:
178:
154:
111:
The cost of equity is typically calculated using the
682:"8.10 Application IBM Step 1: Estimating Book Value"
888:Valuing A Company Using The Residual Income Method
585:
415:
338:
297:
184:
160:
39:capital. Here, "residual" means in excess of any
106:
1571:
830:
123:Equity Charge = Equity Capital x Cost of Equity,
734:"December 2018 CFA Level 1: Study Session List"
427:In the second step, the RI valuation is then:
953:
131:Residual income = Net Income − Equity Charge.
633:before the methodology may be applied. See
55:. The approach is largely analogous to the
1554:
1544:
960:
946:
652:Valuation (finance)#Net asset value method
416:{\displaystyle T_{m}={RI_{m} \over (r-g)}}
140:Using the residual income approach, the
916:Residual Income Valuation: The Problems
598:Comparison with other valuation methods
43:measured relative to the book value of
1572:
71:The underlying idea is that investors
941:
835:
718:Joakim Levin and Per Olsson (2000).
192:, resulting in the general formula:
144:can be calculated as the sum of its
135:
115:, although other approaches such as
881:
783:"Management Accounting: Chapter 14"
13:
845:, Berkeley and Los Angeles, 1961.
780:
247:
14:
1596:
1553:
1543:
868:Contemporary Accounting Research
731:
612:weighted average cost of capital
312:book value may be required; see
308:Here various adjustments to the
103:to more traditional techniques.
897:Residual Income Valuation Model
35:that formally accounts for the
1340:Debtor-in-possession financing
843:University of California Press
800:
774:
751:
725:
712:
699:
674:
565:
552:
524:
511:
407:
395:
326:or "constant growth", at time
283:
270:
107:Calculation of residual income
1:
933:Stockholm School of Economics
831:External links and references
1280:Staggered board of directors
732:Team, The AnalystNotes CFA.
79:from their resources – i.e.
7:
1397:Accretion/dilution analysis
640:
324:assumed to achieve maturity
10:
1601:
1360:Leveraged recapitalization
142:value of a company's stock
66:
1539:
1531:Valuation using multiples
1516:Sum-of-the-parts analysis
1486:Modigliani–Miller theorem
1387:
1345:Dividend recapitalization
1325:
1173:
1160:Secondary market offering
1063:
1052:
979:
705:Robert F. Halsey (2001).
31:, RIM) is an approach to
17:Residual income valuation
1549:List of investment banks
1464:Free cash flow to equity
1290:Super-majority amendment
1215:Management due diligence
1155:Seasoned equity offering
920:Stern School of Business
873:Peasnell, K.V. (1982). "
667:
657:Clean surplus accounting
314:Clean surplus accounting
23:; also, residual income
1260:Shareholder rights plan
1250:Post-merger integration
1220:Managerial entrenchment
1190:Contingent value rights
1130:Initial public offering
604:dividend discount model
348:Perpetuity Growth Model
1402:Adjusted present value
1265:Special-purpose entity
1103:Direct public offering
1073:At-the-market offering
862:Ohlson, J. A. (1995).
627:Stern Stewart & Co
587:
492:
417:
340:
299:
251:
186:
162:
1417:Conglomerate discount
907:University of Navarra
588:
466:
418:
341:
300:
231:
187:
163:
1585:Fundamental analysis
1439:Economic value added
1434:Discounted cash flow
911:IESE Business School
870:, 11 (Spring), 1995.
855:Magni, C.A. (2009).
812:www.analystforum.com
738:www.analystnotes.com
608:discounted cash flow
606:(DDM) (and to other
434:
361:
330:
199:
176:
152:
148:today (i.e. at time
97:discounted cash flow
45:shareholders' equity
27:and residual income
1580:Valuation (finance)
1024:Senior secured debt
924:New York University
918:, James A. Ohlson,
905:, Pablo Fernandez,
1559:Outline of finance
1471:Market value added
1454:Financial modeling
1412:Business valuation
1335:Debt restructuring
1113:Follow-on offering
1098:Corporate spin-off
1056:(terms/conditions)
973:investment banking
931:, Kenth Skogsvik,
836:Primary references
686:www.ftsmodules.com
583:
413:
336:
295:
182:
158:
1567:
1566:
1491:Net present value
1476:Minority interest
1407:Associate company
1383:
1382:
1350:Financial sponsor
1270:Special situation
1240:Pre-emption right
1230:Minority discount
1140:Private placement
1039:Subordinated debt
994:Exchangeable debt
981:Capital structure
969:Corporate finance
781:Martin, James R.
581:
534:
411:
350:to calculate the
339:{\displaystyle m}
322:, the company is
293:
185:{\displaystyle r}
161:{\displaystyle 0}
136:Valuation formula
89:shareholder value
41:opportunity costs
1592:
1557:
1556:
1547:
1546:
1449:Fairness opinion
1444:Enterprise value
1427:Weighted average
1355:Leveraged buyout
1210:Drag-along right
1108:Equity carve-out
1065:Equity offerings
1061:
1060:
1057:
1029:Shareholder loan
1014:Second lien debt
1009:Preferred equity
989:Convertible debt
962:
955:
948:
939:
938:
899:, ftsmodules.com
882:Other references
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647:Enterprise value
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85:opportunity cost
33:equity valuation
1600:
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1593:
1591:
1590:
1589:
1570:
1569:
1568:
1563:
1535:
1511:Stock valuation
1506:Residual income
1422:Cost of capital
1379:
1375:Project finance
1365:High-yield debt
1321:
1300:Tag-along right
1225:Mandatory offer
1195:Control premium
1176:
1169:
1145:Public offering
1093:Bought out deal
1055:
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1048:
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93:Economic profit
69:
53:cost of capital
49:residual income
12:
11:
5:
1598:
1588:
1587:
1582:
1565:
1564:
1562:
1561:
1551:
1540:
1537:
1536:
1534:
1533:
1528:
1526:Terminal value
1523:
1518:
1513:
1508:
1503:
1498:
1493:
1488:
1483:
1478:
1473:
1468:
1467:
1466:
1459:Free cash flow
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1419:
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1404:
1399:
1393:
1391:
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1384:
1381:
1380:
1378:
1377:
1372:
1370:Private equity
1367:
1362:
1357:
1352:
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1337:
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1049:
1047:
1046:
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1036:
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1026:
1021:
1016:
1011:
1006:
1001:
999:Mezzanine debt
996:
991:
985:
983:
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976:
965:
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950:
942:
936:
935:
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832:
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814:. 3 April 2012
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352:terminal value
335:
320:More typically
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181:
157:
137:
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125:
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108:
105:
77:rate of return
68:
65:
37:cost of equity
9:
6:
4:
3:
2:
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1403:
1400:
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1371:
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1203:
1201:
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1191:
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1120:
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1079:
1078:Book building
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310:balance sheet
287:
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170:present value
155:
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90:
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58:
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50:
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38:
34:
30:
26:
22:
18:
1505:
1501:Real options
1317:Tender offer
1177:acquisitions
1165:Underwriting
1150:Rights issue
1053:Transactions
892:Investopedia
816:. Retrieved
811:
802:
790:. Retrieved
786:
776:
765:. Retrieved
753:
741:. Retrieved
737:
727:
714:
701:
689:. Retrieved
685:
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426:
318:
307:
139:
126:
110:
70:
48:
28:
24:
20:
16:
15:
1275:Squeeze-out
1245:Proxy fight
1175:Mergers and
1088:Bought deal
1019:Senior debt
1574:Categories
1521:Tax shield
1481:Mismarking
1285:Stock swap
1235:Pitch book
1205:Divestment
1083:Bookrunner
1004:Pari passu
851:0520003764
767:2018-10-02
168:) and the
146:book value
101:complement
1496:Pure play
1389:Valuation
1255:Sell side
1118:Greenshoe
818:2 October
792:2 October
787:maaw.info
743:2 October
691:2 October
573:−
486:−
468:∑
402:−
248:∞
233:∑
1327:Leverage
1305:Takeover
1200:Demerger
1185:Buy side
641:See also
1310:Reverse
1295:Synergy
1135:Pre-IPO
1123:Reverse
1044:Warrant
759:"Val22"
662:T-model
73:require
67:Concept
849:
81:equity
29:method
1034:Stock
762:(PDF)
668:Notes
631:NOPAT
127:and
25:model
971:and
847:ISBN
820:2018
794:2018
745:2018
693:2018
113:CAPM
614:).
117:APT
61:MVA
57:EVA
21:RIV
1576::
922:,
909:–
890:,
866:,
810:.
785:.
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684:.
637:.
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954:t
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537:+
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501:I
497:R
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475:=
472:t
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459:0
455:V
451:B
448:=
443:0
439:V
423:.
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405:g
399:r
396:(
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375:=
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366:T
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288:t
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280:r
277:+
274:1
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260:I
256:R
243:1
240:=
237:t
229:+
224:0
220:V
216:B
213:=
208:0
204:V
180:r
156:0
59:/
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