Residual Income Model
Definition
What is Residual Income Model?
A model valuing equity as book valueThe accounting value of shareholders' equity. plus the present valueThe current worth of money expected in the future after applying a discount rate. of future profit above the required returnThe minimum expected return an investor demands for the time and risk involved. on equity.
Example in practice
How This Looks in Practice
A bank's value reflects book equity and expected excess returns.
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Related Terms
Market Value
The price at which an asset could trade in the market at a given time.
ValuationIntrinsic Value
An estimate of an asset's underlying economic worth based on expected cash flows, assets, or earning power.
ValuationFair Value
An estimate of an asset's appropriate value under specified assumptions or accounting standards.
Capital BudgetingNet Present Value
Present value of expected cash inflows minus present value of expected cash outflows.