1. Introduction

• Overview of residual income and its role in valuing common equity.

2. Components of Residual Income

• Related measures:
  • NOPAT (Net Operating Profit After Taxes)
  • Cost of Capital (C%)
  • Total Capital (TC)

3. Uses of Residual Income

• Applications in equity valuation and forecasting.

4. Forecasting Residual Income

• Examples:
  • Forecasting Residual Income for One Year
  • Forecasting Residual Income for Two Years
  • Calculations for charge on equity capital and residual income.

5. Valuing Common Stock Using Residual Income

• Examples:
  • Step-by-step valuation of residual income over a multi-year period.
  • Key assumptions in valuation.

6. Determinants of Residual Income

• Discussion on factors influencing residual income.
• Residual income valuation and price-to-book (P/B) ratio.

7. Single-Stage Residual Income Models

• Examples:
  • Single-stage residual income calculations.
  • Introduction to continuing residual income and persistence factors.

8. Multistage Residual Income Models

• Examples:
  • Multistage model calculations with varying persistence factors (ω).
  • Scenarios for ω = 0, ω = 1.0, and ω = 0.6.

9. Comparison with Other Valuation Models

• Residual Income vs. Dividend and FCFE models.
• Strengths and weaknesses of the residual income model.

10. Accounting and Model Assumptions

• Clean surplus accounting principles.
• Importance in residual income calculations.