Learning Outcome Statements

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.