CFA Level 2 | Equity: Residual Income Model

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CFA Level 2
Topic: Equity Valuation
Reading: Residual Income Valuation
The residual income model is used to estimate the intrinsic value of equity.
This video covers:
a definition of the residual income model
guidelines for using the residual income model
an example on estimating intrinsic value using the residual income model
Find out more about the CFA Level 2 exam preparatory courses offered at Noesis (www.noesis.edu.sg/programme/cfa). We offer face-to-face tuition classes (lecture and revision/review) in Malaysia and the Blended Online (B/O) mode for candidates from Malaysia, Singapore, and Vietnam.

[@thanhang4949]

Thanks Moa, very good at explaining and summarising RI model!

[@FabianMoa]

Glad it was helpful!

[@richardgordon]

You are really good at explaining this stuff!!

[@FabianMoa]

Thanks for the compliment, Richard! Hope you found it useful

[@harrisonmacgeorge3518]

Hi Fabian, why does the ' * Bt-1' remain when you divide through by Bt-1 to express EPS in the form of ROE? I thought it would have gone something like the below. What am I missing? I.e. RI = Et - (r * Bt-1) RI = RI = Et/Bt-1 - (r * Bt-1)/Bt-1 RI = ROE - r

[@Vedicqueen]

suppose I have to calculate it for a real listed firm, what should I take as my required rate of return?

[@FabianMoa]

Cost of equity

[@newmercies1]

Use the CAPM model to calculate your cost of equity. The average Eq.Risk Premium of S&P 500 from 1928-2022 (end of) is 6.64%

[@newmercies1]

@@FabianMoa was wondering if you could advise on the multi-stage residual income valuation. I am struggling with that. Any videos?

[@FabianMoa]

Yes, I do have 2-3 videos on that. Check out the Level 2 playlist on my channel.