Calculating Residual Income Using the Model

Understanding equity valuation techniques is crucial for investors. One of the prominent methods used is the Residual Income Model, which helps in valuing a company based on its ability to generate income above its required return on equity. In this model, residual income is calculated as the net income of the company minus the equity charge, which is the product of the equity capital and the required rate of return.

Consider a company with the following details: It has a net income of $500,000, total equity of $2,000,000, and a required rate of return of 10%. What would be the residual income for this company?