Residual Income Calculator

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Corporate mode uses net income and shareholders equity. Managerial mode uses operating income and average operating assets, matching a divisional performance or project approval context.
Net income (bottom line) from the income statement for the period.
Total shareholders equity (book value) at the start of the period, from the balance sheet.
The required rate of return demanded by equity investors. Often estimated with CAPM: risk-free rate + beta x equity risk premium.
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Extends the calculator with a multi-period Residual Income Valuation Model to estimate the intrinsic value per share of equity.
Currency
Residual IncomeValue Creating
$20,000,000

Economic profit after deducting the equity charge. Positive means value is being created; negative means it is being destroyed.

Equity Charge$60,000,000
Return on Equity (ROE)0.13%
ROE minus Cost of Equity Spread0.03%
Residual Income$20,000,000
Equity Charge$60,000,000
Capital Charge-

This business is creating shareholder value.

  • The business earns a 13.33% return on equity against a 10.00% cost of equity, a spread of +3.33 percentage points.
  • The equity charge of $60,000,000 represents what shareholders require at minimum.
  • Positive residual income means the company is generating returns above the cost of equity and is creating value for shareholders.

Next stepCompare the ROE-cost-of-equity spread against sector peers to assess competitive advantage and sustainability.

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