9.7  Residual Income Exercise: IBM Exercise

We verify for the same cost of equity capital as follows:

Residual Earnings Calculations for IBM:

Difference:  (RE₂₀₁₁) 7.365 – (RE₂₀₁₀) 7.077 = 0.289 which equals the above 2010 Abnormal Earnings Growth above.

This verifies the analytical result for IBM

Finally, in the next section we apply this model to assess intrinsic value.

Working with the Valuation Tutor

First launch the Valuation Tutor and select International Business Machine (IBM), Accounting Valuation Models and select the Abnormal Earnings Growth Valuation as illustrated below:

Next click beside Stage 1 Discount Rate and Stage 2 Discount Rate and select CAPM for each.  The resulting calculator from this step is displayed below:

You can enter values into Valuation Tutor by several methods. 

Enter Data Directly and save your dataset:

You can type each number directly into the above calculator (for non-derived fields).  That is, Stage 1 and Stage 2 discount rates are derived fields from the inputs into CAPM in the above example (e.g., Risk free Rate, Equity Premium and Beta).