genuinecfa

eh, there is intuition there. if it's worth your time, try to figure out what they are doing.

Like start with residual income is addition amount earned over required, that's N.I. - r_e*BVo. Or in terms of rates, it's (ROE - r)*BVo.

Whenever you have a stream of cash flows, you take the stream/(r-g) to get the PV. Here the stream = Residual Income (either of the two formulas in the prior sentence)

In this case total value is your current BV + anticipated excess returns: = BVo + R.I./(r-g).

You just have to get the idea down that it's excess earning in a period, and then determine if this amount becomes stable/constant, so that you can use the R.I/(r-g) formula. If not, you have to look at it period by period.

Also, it's always using net incomes, and equity values for discounting and returns. So debt is not considered anywhere.