Residual Income Valuation Calculator
The residual income model values equity by recognising that a firm only creates value when it earns more than the required return on its equity capital. It starts from the current book value of equity and adds the present value of all future residual income, the earnings above the equity charge. This calculator takes the beginning book value, next period net income, the cost of equity, and a perpetual residual income growth rate, then returns the equity charge, residual income, and intrinsic value of equity. All rates are user inputs you set from your forecast.
Residual income valuation formula
Equity charge = r * B0
Residual income RI1 = net income - equity charge
Intrinsic value V = B0 + RI1 / (r - g)
B0 is the beginning book value of equity, r is the cost of equity, and g is the perpetual residual income growth rate. The model adds the present value of value-creating residual income to the book value already on the balance sheet.
Applying the residual income model
- The model builds on the clean surplus relation, where ending book value equals beginning book value plus net income minus dividends.
- A firm with residual income of zero is worth exactly its book value.
- It is well suited to non-dividend-paying firms and to cases where book value is reliable.
- The single-stage form requires the cost of equity r to exceed the growth rate g.
- Results depend heavily on the accounting quality of reported book value and net income.
Residual income valuation: frequently asked questions
What is residual income?
Residual income is the net income a firm earns above the required charge on its equity capital. It equals net income minus the equity charge, where the equity charge is the cost of equity multiplied by the beginning book value of equity. Positive residual income means the firm earned more than its required return.
What is the residual income valuation formula?
The single-stage residual income model values equity as the current book value plus the present value of future residual income growing at a constant rate: V = B0 + RI1 / (r - g), where B0 is current book value, RI1 is next period residual income, r is the cost of equity, and g is the residual income growth rate.
How is the equity charge calculated?
The equity charge equals the cost of equity (a percentage) times the beginning book value of equity. It represents the minimum dollar return shareholders require for the capital they have invested. Net income above this charge is the residual income that adds to intrinsic value.
Why must the cost of equity exceed the growth rate?
The single-stage model uses a perpetuity that only converges when the cost of equity r is greater than the residual income growth rate g. If g is greater than or equal to r, the formula gives a negative or undefined result, which has no valid economic interpretation.
When is the residual income model useful?
It is useful for firms that pay no dividends or have unpredictable cash flows, since it relies on accounting book value and earnings rather than payouts. It is also helpful when terminal value dominates a discounted cash flow model, because much of the value is captured in current book value.
Official sources
- U.S. Securities and Exchange Commission: Book value.
- U.S. Securities and Exchange Commission: How stock markets work.
Reviewed by the CalculatorHub team, edited by James Graham, 16 June 2026. See our methodology.