The Residual Income Model

1. Stock Screening on the Canadian Market: The Residual Income Model Thesis Presentation By: Tom Nicholson Advisors: Ken MacAulay and Kirk Collins

2. “To Determine the effectiveness of an operationalized residual income model as a screener for over(under)valued stocks on the Canadian market.” • ie: Is the residual income model and effective way of finding a firm’s intrinsic value? The Objective

3. Academic: The first time that the residual income model will be tested using analyst forecasts on the Canadian Market • Further Canadian residual income model research • Foreign application of American Research • Practical: Provides investors with a portfolio creation strategy • Buy undervalued stocks • Short overvalued stocks The Purpose

4. A firm’s intrinsic value can be estimated as its current Book Value, plus the present value of future cash flows. • Residual income valuation captures these cash flows using “residual income” • So what is “Residual Income?” • Net Income less a charge for common shareholders’ opportunity cost in generating net income The Fundamentals