Calculating Residual Income for DEF Ltd.

Consider the hypothetical company DEF Ltd., which has a projected net income of $500,000 for the upcoming financial year. Lead analyst Sam believes that the company's equity cost is 10% and that the book value of equity at the start of the year is $4,000,000. To estimate the intrinsic value of DEF Ltd. using the Residual Income Valuation approach, how should Sam compute the residual income for this company?

Residual income is calculated as net income minus the equity charge, where the equity charge is calculated by multiplying the cost of equity by the book value of equity from the previous period. In this case, Sam needs to perform a few calculations involving these figures.