- CFA Exams
- Dec. 2020 Level 2
- Study Session 11. Equity Valuation III
- Reading 30. Residual Income Valuation
Reading 30. Residual Income Valuation
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Learning Outcome Statements
Reading 30. Residual Income Valuation | |
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1. Calculating residual income a. calculate and interpret residual income, economic value added, and market value added; | |
2. Commercial implementations of the residual income concept a. calculate and interpret residual income, economic value added, and market value added; | |
3. The residual income valuation model b. describe the uses of residual income models; c. calculate the intrinsic value of a common stock using the residual income model and compare value recognition in residual income and other present value models; | |
4. Fundamental determinants of residual income d. explain fundamental determinants of residual income; e. explain the relation between residual income valuation and the justified price-to-book ratio based on forecasted fundamentals; f. calculate and interpret the intrinsic value of a common stock using single-stage (constant-growth) and multistage residual income models; | |
5. Calculating an implied growth rate in residual income g. calculate the implied growth rate in residual income, given the market price-to-book ratio and an estimate of the required rate of return on equity; | |
6. Multistage residual income valuation h. explain continuing residual income and justify an estimate of continuing residual income at the forecast horizon, given company and industry prospects; | |
7. Residual income valuation in relation to other approaches i. compare residual income models to dividend discount and free cash flow models; j. explain strengths and weaknesses of residual income models and justify the selection of a residual income model to value a company's common stock; | |
8. Accounting and international considerations k. describe accounting issues in applying residual income models; l. evaluate whether a stock is overvalued, fairly valued, or undervalued based on a residual income model. |