Using the Residual-Income Stock Price Valuation Model to Teach and Learn Ratio Analysis
Posted: 21 Jan 2001
This article provides an overview of the residual-income stock price valuation model and demonstrates its use in interpreting the DuPont return on equity (ROE) decomposition. The model provides theoretical support for the DuPont model's focus on ROE and aids in understanding the implications of the price-to-book and price-earnings ratios. I conclude with an application of the model in the valuation of Nordstrom, Inc.
Keywords: Residual income; Dupont; Ratio analysis; Ohlson
JEL Classification: M41, G12
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