Residual Income Model Basics

Very Easy Equity Valuation Techniques Residual Income Models

Residual income models are used to value a company's equity by considering the profits generated above the required rate of return on equity. Understanding the importance of residual income in valuing stocks can help investors identify opportunities. Which of the following statements correctly describes a component of the residual income model?

Residual income is calculated as the net income minus equity charge.

Residual income includes both net income and dividends paid.

Residual income is solely based on historical earnings.

Hint

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