Value a common share with the residual income model and contrast when value is recognised under it and under other present value models

Intrinsic value equals current book value per share plus the present value of expected future residual income: V0 = B0 + sum of RIt ÷ (1 + r)^t, where RIt = Et − r × B(t−1). Book value grows by retained earnings, the part of each year's earnings not paid out as dividends: Bt = B(t−1) + Et − Dt. Compared with dividend and free cash flow models, residual income recognises value earlier, because current book value already accounts for much of the total and only the excess earnings are forecast. The terminal value is therefore a smaller share of the estimate, while in dividend and cash flow models most value often sits in the terminal value. The trap is charging for equity on the same year's ending book value.