Residual Income Calculator: Equity Charge, Division RI and Residual Income Valuation
Calculate residual income (net income minus an equity charge), a division’s residual income, or a share’s value with the residual income model.
How it works
Residual income = net income − cost of equity × equity capital · Division residual income = operating income − minimum required return × average operating assets · Value per share V₀ = B₀ + Σ (EPSₜ − r × Bₜ₋₁) ÷ (1 + r)ᵗ + continuing value ÷ (1 + r)ᵀ · continuing value = RIᵀ⁺¹ ÷ (1 + r − ω) or RIᵀ⁺¹ ÷ (r − g) · Bₜ = Bₜ₋₁ + EPSₜ − dividendsₜ · single stage: V₀ = B₀ + (ROE − r) × B₀ ÷ (r − g)
Residual income is the profit left after charging for every dollar of capital, including the shareholders’ money. Accounting net income already deducts interest on debt but treats equity as free; residual income subtracts an equity charge, the cost of equity times the book value of equity. A positive figure means the company earned more than its shareholders require; a negative one means it earned less, even if it reported a profit. The calculator covers the three ways the term is used. Company RI applies the equity charge to a whole company. Division RI is the management-accounting version used to judge investment centers: operating income minus a hurdle rate times average operating assets, shown next to ROI. RI valuation is the residual income model used by analysts: a share is worth its book value today plus the present value of all future residual income. You forecast ROE and the payout ratio, the calculator rolls book value forward year by year (clean surplus) and adds a continuing value. The persistence factor ω lets residual income fade toward zero as competition erodes excess returns (ω = 0 stops it at once, ω = 1 keeps it forever); the constant-growth option with 0 forecast years is the single-stage model V₀ = B₀ + (ROE − r) × B₀ ÷ (r − g). Residual income is closely related to economic value added (EVA), which charges for all capital, debt and equity, against NOPAT; this calculator works on the equity side, net income and book equity, and adds the per-share valuation model.
Worked example
A company earns net income of $12,000,000 on $90,000,000 of equity capital, and its shareholders require 10%. The equity charge is $90,000,000 × 10% = $9,000,000, so residual income = $12,000,000 − $9,000,000 = $3,000,000. Its ROE is 13.33%, 3.33 points above the cost of equity. In RI valuation mode, a $20.00 book value per share, 15% ROE, 40% payout, 10% cost of equity, 5 forecast years and a persistence factor of 0.6 give first-year EPS of $3.00, an equity charge of $2.00 and residual income of $1.00 per share. Residual income grows with book value to $1.41 in year 5, and the five years are worth $4.46 today. Year 6 residual income of $1.54 fading at ω = 0.6 is worth $1.54 ÷ (1 + 0.10 − 0.6) = $3.08 at year 5, or $1.91 today, so the model value is $20.00 + $4.46 + $1.91 = $26.37 per share, 1.32 times book value.
Sources: AnalystPrep (CFA Level II): Single-stage and multistage residual income valuation examples · Omni Calculator: Residual income (Company Alpha example) · Wall Street Prep: Residual income valuation model · UNC Charlotte (Godfrey): Performance evaluation problem, ROI and residual income
Frequently asked questions
What is the residual income formula?
Residual income = net income − equity charge, where the equity charge is the cost of equity × equity capital. For example, $80,520,000 of net income on $800,000,000 of equity at a 12.3% cost of equity gives an equity charge of $98,400,000 and residual income of −$17,880,000: profitable on paper, but below what shareholders require.
How is residual income used to value a stock?
The residual income model says a share is worth its book value per share plus the present value of expected future residual income per share. If a company is expected to earn exactly its cost of equity, it is worth book value; higher ROE adds value, lower ROE subtracts it.
What is residual income in managerial accounting?
For a division or investment center, residual income = net operating income − minimum required return × average operating assets. With $50,000 of operating income, average operating assets of $150,000 and a 20% hurdle, residual income is $50,000 − $30,000 = $20,000.
What is the difference between residual income and EVA?
Both subtract a capital charge from profit. EVA uses NOPAT and charges WACC on all invested capital, debt and equity. Residual income for shareholders uses net income, which is already after interest, and charges only the cost of equity on book equity.
What persistence factor should I use?
It depends on how long the company can keep earning above its cost of equity. Low values (0.2–0.4) suit firms in competitive industries or with one-off gains; high values (0.7–0.9) suit firms with strong brands, patents or low payout ratios. A factor of 1 assumes residual income never fades.
Related calculators
Educational estimate, not investment advice. Model values depend entirely on the forecast ROE, cost of equity and continuing-value assumptions.