Calculating Residual Income for XYZ Corporation

An investor is considering an equity investment in XYZ Corporation. The company is expected to generate the following forecasted earnings and dividends for the next three years:

- Year 1: Earnings = $5 million, Dividends = $2 million
- Year 2: Earnings = $6 million, Dividends = $2.5 million
- Year 3: Earnings = $7 million, Dividends = $3 million

After the third year, the company expects to maintain a steady growth rate in earnings of 3% per year. The investor requires a rate of return of 10% on this investment. The investor is interested in calculating the residual income for XYZ Corporation to determine its valuation. Which of the following statements correctly describes how to calculate the residual income for Year 1?