Calculating Residual Income for LMN Technologies

Medium Equity Valuation Applications Residual Income Valuation

LMN Technologies is a rapidly growing firm focused on innovative technology solutions. The company has a current book value of equity of $2 million and is expected to generate a net income of $350,000 in the coming year. LMN's cost of equity is estimated to be 10%.

Using the Residual Income Valuation approach, which calculation would correctly determine the residual income for LMN Technologies for the upcoming year?

Residual Income = Net Income - (Cost of Equity * Book Value of Equity) = 350,000 - (0.10 * 2,000,000)

Residual Income = Net Income + (Cost of Equity * Book Value of Equity) = 350,000 + (0.10 * 2,000,000)

Residual Income = (Book Value of Equity * Cost of Equity) / Net Income = (2,000,000 * 0.10) / 350,000

Hint

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