Residual Income Formula, Best MLM Marketing System, residual income formula.#Residual #income #formula

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Residual Income Formula

Valuing a Company Using the Residual Income Formula

A company and its stock can be valued in a variety of ways. One way would be by juxtaposing the multiples and metrics of one company against those of other companies within its industry category or sector; what is known as the relative valuation approach. Another method would be to formulate a value based on an estimate of the company’s value, for example using the dividend discount method or cash flow modeling.

There is a more recent method of absolute valuation; the residual income method, which is largely unknown to most people other than analysts who frequently use the residual income formula to ascertain company value. This article’s purpose is to illustrate the principles upon which the residual income formula is based and how it can be used to determine the absolute value of a company.

Introduction to the Residual Income Formula

When the words “Residual Income” come to mind, it is often associated with surplus cash and money to burn. Although this may be an accurate association when looking over a personal finance plan, when it comes to discussing equity evaluation we refer to the income made by a company after taking into account the true cost of its capital as residual income.

This is where some clever folks start wondering if this is not already done by a company when they account for their capital’s cost in their routine interest expense reports. This is true in a way, but interest expenses as seen on the income statements only only account for the cost of a company’s debt, not including costs of equity like dividend payouts etc.

Another way to look at the cost of equity is to look at it as the required rate of return or the shareholder’s opportunity costs. What the residual income model attempts to provide are adjustments to the future earning estimates so as to compensate for equity costs and improve the precision of the value placed on a company.

Unlike the return to bondholders, the return to equity holders is not a legal obligation, if a company hopes to attract many investors they must offer some sort of compensation for investment risk exposure.

The most important calculation that factors into the equation that produces a business’s residual income is the equity charge. This can be produced by multiplying a company’s total equity capital by that equity’s required rate of return. the Equity charge can also be estimated with the capital asset pricing model.

This Formula below will show how to calculate the equity charge:

A Equity Charge

Once you have used that formula to determine the equity charge, this must be subtracted from the company’s net income. The difference will be the residual income.

As an example, let’s say that the X Company reports their last years earnings at $85,000 and has invested $750,000 worth of equity into its capital structure with 11% required rate of return.

The residual income formula would be:

First the Equity Charge:

$750,000 X .11 = $82,500

Minus the Equity Charge = $82,500

And the Residual Income is = $2,500

What do we see in this example above? By using the residual income formula we see that even though this X company has reported some nice profits in the last year when you subtract the costs, the return to shareholders, we see some very slim profit margins considering the given risk level. The residual income method can reveal an important factor when deciding the intrinsic value.

Findings like this is what encourages the use of this residual income method. There are many situations where a company may appear very successful based off accounting reports, yet when it is viewed from the perspective of a shareholder it can hardly be considered profitable if its not generating any residual income.

Finding the Intrinsic Value With Residual Income

Now that you have learned how to calculate the residual profits of a company you will have the tools to begin determining the intrinsic value of a company. In the same way that other absolute valuation methods are used in residual income modeling the idea of discounting future earnings can be applicable as well.

The intrinsic value of a company, also known as its fair value, can be separated into book value and present values of projected future residual incomes when using the residual income approach. You may have noticed that this residual income formula and its valuation applications are similar to the multi stage dividend discount model because it also substitutes any future dividend payments with expected future residual incomes.

The residual income method provides several advantages and drawbacks when you compare it with other more popular methods of determining the absolute value of a company, like DCF or dividend discount methods.

On the one hand, using the residual income model means that you will operate off of information that is readily available on the company’s financial statements and can also be applied to companies that don’t generate positive cash flow or pay dividends. Additionally, as we mentioned before the residual income models reflect more than just the company’s accounting profitability and shine a light on the actual economic profitability, which is more important from the shareholder’s view.

The biggest disadvantage of the residual income method is that it places so much stock in the ability to predict the future, inasmuch as it relies on estimates of a firm’s anticipated financial statements. This leaves predictions that are seriously affected by previous misrepresentations on a company’s financial statements, psychological bias etc.

This being said the residual income method of company valuation is in fact a very applicable method of making valuations and can even be practiced by rookie investors. When used in combination with other methods of company valuation, the residual income method can provide you with a clear insight into a company s true intrinsic value.


Tax treatment of income from income trusts, canadian income trusts.#Canadian #income #trusts

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Tax Treatment of Income From Investments in Income Trusts

The following information is regarding investments which are held outside of RRSPs or other registered accounts.

Cash distributions from income trusts can be made up of:

Canadian income trusts

Canadian income trusts

Canadian income trusts

Canadian income trusts

Canadian income trusts

Canadian income trusts

Canadian income trusts

Canadian income trusts

Canadian income trusts

Canadian income trusts

Canadian income trusts

Canadian income trusts

The tax treatment of cash distributions are reported to unitholders on T3 slips, which must be mailed by March 31 each year. The percentages allocated to each type of income may vary over time. The history of taxable distributions can usually be found on the website of an income trust.

Negative Adjusted Cost Base

Return of capital (ROC) is reported in box 42 of the T3 slip, which is described as amount resulting in cost base adjustment . If the ROC reduces the ACB below zero, the negative ACB is reported as a capital gain on line 132 of Schedule 3 of your tax return. Since there is no actual sale of units, line 131 (proceeds of disposition) will be zero. The negative ACB will be shown as a negative amount in the adjusted cost base column, which results in a capital gain on line 132 (gain or loss). The ACB of your trust units are then deemed to be zero.

Specified Investment Flow-Throughs

On October 31, 2006 the federal government announced new rules for the taxation of specified investment flow-throughs , or SIFTs. SIFTs will generally include publicly-traded income trusts, as well as publicly traded partnerships holding significant investments in Canadian properties. These changes will apply in the 2007 tax year for income trusts that begin trading publicly after October 2006, but will not apply until 2011 for income trusts that were traded publicly prior to November 2006.

Under old rules, when calculating taxable income, income trusts could deduct the income and capital gains paid to unitholders. Any remaining taxable income was taxed at the highest personal tax rate of 29%, plus applicable provincial taxes.

Under the new rules, SIFT trusts will not be able to deduct most of these amounts (non-portfolio earnings). However, the tax rate that is applied to the distributed non-portfolio earnings of a SIFT trust will be reduced to a rate equivalent to the corporate tax rate (21% in 2007), plus 13% for provincial taxes. The distributed non-portfolio earnings of the SIFT trust will be taxed in the hands of investors as Canadian dividends eligible for the enhanced dividend tax credit.

Undistributed taxable income of a SIFT trust will still be taxed at the old rates.

Return of capital (ROC) treatment will not change – distributions of ROC are not deductible to the trust, and not taxable when received by investors. The ROC amounts reduce the cost basis of the investor’s holdings of the trust.

Tax Tip: Whether to hold income trusts inside or outside a registered account depends on the make-up of the cash distributions. If they are mostly interest, they should be inside a registered account. If they are mostly Canadian dividends, capital gains, or return of capital, they should be outside.

We do not recommend income trusts for the novice investor, because:

Canadian income trusts


Daily Residual Income Formula – My 5 Figure Daily Residual Income Formula, residual income formula.#Residual

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    E-File: Electronic Filing for Income Tax Returns, e filing income.#E #filing #income

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    E-File Income Tax Return

    E filing income

    E-File is the term for electronic filing or sending your income tax return from tax software via the Internet to the IRS or state tax authority. It s simple and efficient and has become increasingly popular since it was introduced nationally in 1990. In 2016, nearly 90 percent of federal taxes were filed electronically.

    E-filing is safe! Filing your taxes electronically is actually more secure than snail-mailing your filing to the IRS.

    There is less chance that the data contained within your tax documents will be compromised, as it s encrypted when sent electronically.

    The Many Benefits of E-Filing Your Taxes

    The benefits of filing taxes electronically over mailing in your return are numerous. From convenience to speed to accuracy, e-filing has become the most popular way to file for American taxpayers, and with good reason.

    • Easy: With e-filing, you can file your taxes from anywhere, including the comfort of your own couch. Tax data can be sent any time before the deadline, day or night, according to your own schedule. All popular tax software programs have e-file options, and there are even apps, such as TurboTax SnapTax, that allow you to file directly from your smartphone. The IRS also has an official app, IRS2GO, which allows you to track your tax filings once they ve been submitted.
    • Faster: When you file electronically, you don t have to bother with making copies, purchasing stamps or heading to the post office. Once the documents are ready, you simply click a button on your computer to send them directly to the IRS. Also, the IRS processes electronically submitted taxes more quickly, usually within three weeks. Any refunds can be deposited directly into your preferred bank account, meaning you get your money back more quickly.
    • More Accurate: Because the tax software programs do the math for you, the chance of a mathematical error on your returns is greatly reduced.
    • Higher Refunds: Many online filers report that it s easier to take advantage of tax credits and tax deductions when they e-file. This may lead to higher refunds or lower tax bills.
    • Cheaper: Because e-filling simplifies the tax preparation process, you may be able to forego hiring an accountant or tax service to prepare your taxes for you. This could save you $100 or more. Invest in a good tax software program and you ll be on your way to savings. Additionally, e-filed returns cost 20 times less to process compared to a paper return, which saves taxpayers a lot of money.
    • Maintain Your Tax History: E-filing allows you to keep an ongoing record of all your returns. No more digging through files to locate your tax returns from three years ago. Having your tax history at your fingertips can also make forward financial planning easier.

    Given the ease and accuracy of electronic filing, it s no surprise that it s become so popular. E-filing can be done from a number of desktop or online tax software titles, and there is free tax software that includes federal e-File.