CFA Level II

Residual income valuation

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Level II topics
1. Equity Valuation: Applications and Processes
2. Return Concepts
3. Industry and Company Analysis
4. Discounted Dividend Valuation
5. Free Cash Flow Valuation
6. Market-Based Valuation: Price and Enterprise Value Multiples
7. Residual Income Valuation
8. Private Company Valuation

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Compiled by Hedge Academy (+84) 0869231510
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Residual income = Net income – equity charges
Calculate Residual income, EVA, MVA
Compiled by Hedge Academy (+84) 0869231510
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Skype: Khanhn1510@outlook.com.vn MVA = Market value – Total capital
EVA = NOPAT – WACC x Total capital
Calculate Residual income, EVA, MVA
 Residual income valuation
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V0 = value of a share of stock today (t = 0)

B0 = current per- share book value of equity
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Bt = expected per- share book value of equity at any time t

r = required rate of return on equity investment (cost of equity)
Et = expected EPS for period t
RIt = expected per- share residual income
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Single stage valuation
 Multi-stage valuation
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1. Residual Income Persists at the Current Level Forever: ω = 1

2. Residual Income Drops Immediately to Zero: ω= 0

3. Residual Income Declines Over Time to Zero: 0<ω<1 and ω will be given

4. Residual Income Declines to Long-Run Level in Mature Industry

Compiled by Hedge Academy (+84) 0869231510
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Multi-stage valuation
Compiled by Hedge Academy (+84) 0869231510
Hedge.Academy@gmail.com
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Skype: Khanhn1510@outlook.com.vn
Multi-stage valuation
 Compiled by Hedge Academy (+84) 0869231510
Hedge.Academy@gmail.com
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