2018 CFA level 2 study note book3 unprotected

Table of Contents
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Getting Started Flyer
Table of Contents
Page List
Book 3: Equity
Readings and Learning Outcome Statements
Equity Valuation: Applications and Processes
1. LOS 27.a: Define valuation and intrinsic value and explain sources of
perceived mispricing.
2. LOS 27.b: Explain the going concern assumption and contrast a going
concern value to a liquidation value;
3. LOS 27.c: Describe definitions of value and justify which definition of value
is most relevant to public company valuation.
4. LOS 27.d: Describe applications of equity valuation.
5. LOS 27.e: Describe questions that should be addressed in conducting an
industry and competitive analysis.
6. LOS 27.f: Contrast absolute and relative valuation models and describe
examples of each type of model.
7. LOS 27.g: Describe sum-of-the-parts valuation and conglomerate discounts.
8. LOS 27.h: Explain broad criteria for choosing an appropriate approach for
valuing a given company.
9. Key Concepts

1. LOS 27.a
2. LOS 27.b
3. LOS 27.c
4. LOS 27.d
5. LOS 27.e
6. LOS 27.f
7. LOS 27.g
8. LOS 27.h
10. Concept Checkers
1. Answers – Concept Checkers
7. Return Concepts
1. LOS 28.a: Distinguish among realized holding period return, expected
holding period return, required return, return from convergence of price to
intrinsic value, discount rate, and internal rate of return.
2. LOS 28.b: Calculate and interpret an equity risk premium using historical
and forward-looking estimation approaches.
3. LOS 28.c: Estimate the required return on an equity investment using the
capital asset pricing model, the Fama–French model, the Pastor–
Stambaugh model, macroeconomic multifactor models, and the build-up


method (e.g., bond yield plus risk premium).
4. LOS 28.d: Explain beta estimation for public companies, thinly traded public
companies, and nonpublic companies.
5. LOS 28.e: Describe strengths and weaknesses of methods used to estimate
the required return on an equity investment.
6. LOS 28.f: Explain international considerations in required return
estimation.
7. LOS 28.g: Explain and calculate the weighted average cost of capital for a
company.

8. LOS 28.h: Evaluate the appropriateness of using a particular rate of return
as a discount rate, given a description of the cash flow to be discounted
and other relevant facts.
9. Key Concepts
1. LOS 28.a
2. LOS 28.b
3. LOS 28.c
4. LOS 28.d
5. LOS 28.e
6. LOS 28.f
7. LOS 28.g
8. LOS 28.h
10. Concept Checkers
1. Answers – Concept Checkers
8. Industry and Company Analysis
1. LOS 29.a: Compare top-down, bottom-up, and hybrid approaches for
developing inputs to equity valuation models.
2. LOS 29.b: Compare “growth relative to GDP growth” and “market growth
and market share” approaches to forecasting revenue.
3. LOS 29.c: Evaluate whether economies of scale are present in an industry
by analyzing operating margins and sales levels.
4. LOS 29.d: Forecast the following costs: cost of goods sold, selling general
and administrative costs, financing costs, and income taxes.
5. LOS 29.e: Describe approaches to balance sheet modeling.
6. LOS 29.f: Describe the relationship between return on invested capital and
competitive advantage.
7. LOS 29.g: Explain how competitive factors affect prices and costs.
8. LOS 29.h: Judge the competitive position of a company based on a Porter’s
five forces analysis.
9. LOS 29.i: Explain how to forecast industry and company sales and costs

when they are subject to price inflation or deflation.
10. LOS 29.j: Evaluate the effects of technological developments on demand,
selling prices, costs, and margins.
11. LOS 29.k: Explain considerations in the choice of an explicit forecast
horizon.


12. LOS 29.l: Explain an analyst’s choices in developing projections beyond the
short-term forecast horizon.
13. LOS 29.m: Demonstrate the development of a sales-based pro forma
company model.
14. Key Concepts
1. LOS 29.a
2. LOS 29.b
3. LOS 29.c
4. LOS 29.d
5. LOS 29.e
6. LOS 29.f
7. LOS 29.g
8. LOS 29.h
9. LOS 29.i
10. LOS 29.j
11. LOS 29.k
12. LOS 29.l
13. LOS 29.m
15. Concept Checkers
1. Answers – Concept Checkers
9. Discounted Dividend Valuation
1. LOS 30.a: Compare dividends, free cash flow, and residual income as inputs
to discounted cash flow models and identify investment situations for

which each measure is suitable.
2. LOS 30.b: Calculate and interpret the value of a common stock using the
dividend discount model (DDM) for single and multiple holding periods.
3. LOS 30.c: Calculate the value of a common stock using the Gordon growth
model and explain the model’s underlying assumptions.
4. LOS 30.d: Calculate and interpret the implied growth rate of dividends
using the Gordon growth model and current stock price.
5. LOS 30.e: Calculate and interpret the present value of growth opportunities
(PVGO) and the component of the leading price-to-earnings ratio (P/E)
related to PVGO.
6. LOS 30.f: Calculate and interpret the justified leading and trailing P/Es using
the Gordon growth model.
7. LOS 30.g: Calculate the value of noncallable fixed-rate perpetual preferred
stock.
8. LOS 30.h: Describe strengths and limitations of the Gordon growth model
and justify its selection to value a company’s common shares.
9. LOS 30.i: Explain the assumptions and justify the selection of the two-stage
DDM, the H-model, the three-stage DDM, or spreadsheet modeling to
value a company’s common shares.
10. LOS 30.j: Explain the growth phase, transitional phase, and maturity phase
of a business.


11. LOS 30.k: Describe terminal value and explain alternative approaches to
determining the terminal value in a DDM.
12. LOS 30.l: Calculate and interpret the value of common shares using the
two-stage DDM, the H-model, and the three-stage DDM.
13. LOS 30.m: Estimate a required return based on any DDM, including the
Gordon growth model and the H-model.
14. LOS 30.n: Explain the use of spreadsheet modeling to forecast dividends

and to value common shares.
15. LOS 30.o: Calculate and interpret the sustainable growth rate of a company
and demonstrate the use of DuPont analysis to estimate a company’s
sustainable growth rate.
16. LOS 30.p: Evaluate whether a stock is overvalued, fairly valued, or
undervalued by the market based on a DDM estimate of value.
17. Key Concepts
1. LOS 30.a
2. LOS 30.b
3. LOS 30.c
4. LOS 30.d
5. LOS 30.e
6. LOS 30.f
7. LOS 30.g
8. LOS 30.h
9. LOS 30.i, l
10. LOS 30.j
11. LOS 30.k
12. LOS 30.m
13. LOS 30.n
14. LOS 30.o
15. LOS 30.p
18. Concept Checkers
1. Answers – Concept Checkers
19. Challenge Problems
1. Answers – Concept Checkers
10. Free Cash Flow Valuation
1. LOS 31.a: Compare the free cash flow to the firm (FCFF) and free cash flow
to equity (FCFE) approaches to valuation.
2. LOS 31.b: Explain the ownership perspective implicit in the FCFE approach.

3. LOS 31.c: Explain the appropriate adjustments to net income, earnings
before interest and taxes (EBIT), earnings before interest, taxes,
depreciation, and amortization (EBITDA), and cash flow from operations
(CFO) to calculate FCFF and FCFE.
4. LOS 31.d: Calculate FCFF and FCFE.
5. LOS 31.e: Describe approaches for forecasting FCFF and FCFE.
6. LOS 31.f: Compare the FCFE model and dividend discount models.


7. LOS 31.g: Explain how dividends, share repurchases, share issues, and
changes in leverage may affect future FCFF and FCFE.
8. LOS 31.h: Evaluate the use of net income and EBITDA as proxies for cash
flow in valuation.
9. LOS 31.i: Explain the single-stage (stable-growth), two-stage, and threestage FCFF and FCFE models and select and justify the appropriate model
given a company’s characteristics.
10. LOS 31.j: Estimate a company’s value using the appropriate free cash flow
model(s).
11. LOS 31.k: Explain the use of sensitivity analysis in FCFF and FCFE valuations.
12. LOS 31.l: Describe approaches for calculating the terminal value in a
multistage valuation model.
13. LOS 31.m: Evaluate whether a stock is overvalued, fairly valued, or
undervalued based on a free cash flow valuation model.
14. Key Concepts
1. LOS 31.a
2. LOS 31.b
3. LOS 31.c,31.d
4. LOS 31.e
5. LOS 31.f
6. LOS 31.g
7. LOS 31.h

8. LOS 31.i, j
9. LOS 31.k
10. LOS 31.l
11. LOS 31.m
15. Concept Checkers
1. Answers – Concept Checkers
16. Challenge Problems
1. Answers – Challenge Problems
11. Market-Based Valuation: Price and Enterprise Value Multiples
1. LOS 32.a: Distinguish between the method of comparables and the method
based on forecasted fundamentals as approaches to using price multiples
in valuation, and explain economic rationales for each approach.
2. LOS 32.b: Calculate and interpret a justified price multiple.
3. LOS 32.c: Describe rationales for and possible drawbacks to using
alternative price multiples and dividend yield in valuation.
4. LOS 32.d: Calculate and interpret alternative price multiples and dividend
yield.
5. LOS 32.e: Calculate and interpret underlying earnings, explain methods of
normalizing earnings per share (EPS), and calculate normalized EPS.
6. LOS 32.f: Explain and justify the use of earnings yield (E/P).
7. LOS 32.g: Describe fundamental factors that influence alternative price
multiples and dividend yield.


8. LOS 32.h: Calculate and interpret the justified price-to-earnings ratio (P/E),
price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on
forecasted fundamentals.
9. LOS 32.i: Calculate and interpret a predicted P/E, given a cross-sectional
regression on fundamentals, and explain limitations to the cross-sectional
regression methodology.

10. LOS 32.j: Evaluate a stock by the method of comparables and explain the
importance of fundamentals in using the method of comparables.
11. LOS 32.r: Evaluate whether a stock is overvalued, fairly valued, or
undervalued based on comparisons of multiples.
12. LOS 32.k: Calculate and interpret the P/E-to-growth ratio (PEG) and explain
its use in relative valuation.
13. LOS 32.l: Calculate and explain the use of price multiples in determining
terminal value in a multistage discounted cash flow (DCF) model.
14. LOS 32.m: Explain alternative definitions of cash flow used in price and
enterprise value (EV) multiples and describe limitations of each definition.
15. LOS 32.n: Calculate and interpret EV multiples and evaluate the use of
EV/EBITDA.
16. LOS 32.o: Explain sources of differences in cross-border valuation
comparisons.
17. LOS 32.p: Describe momentum indicators and their use in valuation.
18. LOS 32.q: Explain the use of the arithmetic mean, the harmonic mean, the
weighted harmonic mean, and the median to describe the central tendency
of a group of multiples.
19. Key Concepts
1. LOS 32.a
2. LOS 32.b
3. LOS 32.c
4. LOS 32.d
5. LOS 32.e
6. LOS 32.f
7. LOS 32.g
8. LOS 32.h
9. LOS 32.i
10. LOS 32.j
11. LOS 32.k

12. LOS 32.l
13. LOS 32.m
14. LOS 32.n
15. LOS 32.o
16. LOS 32.p
17. LOS 32.q
18. LOS 32.r
20. Concept Checkers


1. Answers – Concept Checkers
21. Challenge Problems
1. Answers – Challenge Problems
12. Residual Income Valuation
1. LOS 33.a: Calculate and interpret residual income, economic value added,
and market value added.
2. LOS 33.b: Describe the uses of residual income models.
3. LOS 33.c: Calculate the intrinsic value of a common stock using the residual
income model and compare value recognition in residual income and other
present value models.
4. LOS 33.d: Explain fundamental determinants of residual income.
5. LOS 33.e: Explain the relation between residual income valuation and the
justified price-to-book ratio based on forecasted fundamentals.
6. LOS 33.f: Calculate and interpret the intrinsic value of a common stock
using single-stage (constant-growth) and multistage residual income
models.
7. LOS 33.g: Calculate the implied growth rate in residual income, given the
market price-to-book ratio and an estimate of the required rate of return
on equity.
8. LOS 33.h: Explain continuing residual income and justify an estimate of

continuing residual income at the forecast horizon, given company and
industry prospects.
9. LOS 33.i: Compare residual income models to dividend discount and free
cash flow models.
10. LOS 33.j: Explain strengths and weaknesses of residual income models and
justify the selection of a residual income model to value a company’s
common stock.
11. LOS 33.k: Describe accounting issues in applying residual income models.
12. LOS 33.l: Evaluate whether a stock is overvalued, fairly valued, or
undervalued based on a residual income model.
13. Key Concepts
1. LOS 33.a
2. LOS 33.b
3. LOS 33.c
4. LOS 33.d
5. LOS 33.e
6. LOS 33.f
7. LOS 33.g
8. LOS 33.h
9. LOS 33.i
10. LOS 33.j
11. LOS 33.k
12. LOS 33.l
14. Concept Checkers


1. Answers – Concept Checkers
15. Challenge Problems
1. Answers – Challenge Problems
13. Private Company Valuation

1. LOS 34.a: Compare public and private company valuation.
2. LOS 34.b: Describe uses of private business valuation and explain
applications of greatest concern to financial analysts.
3. LOS 34.c: Explain various definitions of value and demonstrate how
different definitions can lead to different estimates of value.
4. LOS 34.d: Explain the income, market, and asset-based approaches to
private company valuation and factors relevant to the selection of each
approach.
5. LOS 34.e: Explain cash flow estimation issues related to private companies
and adjustments required to estimate normalized earnings.
6. LOS 34.f: Calculate the value of a private company using free cash flow,
capitalized cash flow, and/or excess earnings methods.
7. LOS 34.g: Explain factors that require adjustment when estimating the
discount rate for private companies.
8. LOS 34.h: Compare models used to estimate the required rate of return to
private company equity (for example, the CAPM, the expanded CAPM, and
the build-up approach).
9. LOS 34.i: Calculate the value of a private company based on market
approach methods and describe advantages and disadvantages of each
method.
10. LOS 34.j: Describe the asset-based approach to private company valuation.
11. LOS 34.k: Explain and evaluate the effects on private company valuations of
discounts and premiums based on control and marketability.
12. LOS 34.l: Describe the role of valuation standards in valuing private
companies.
13. Key Concepts
1. LOS 34.a
2. LOS 34.b
3. LOS 34.c
4. LOS 34.d

5. LOS 34.e
6. LOS 34.f
7. LOS 34.g
8. LOS 34.h
9. LOS 34.i
10. LOS 34.j
11. LOS 34.k
12. LOS 34.l
14. Concept Checkers
1. Answers – Concept Checkers


14. Self-Test: Equity Valuation
1. Self-Test Answers: Equity Valuation
15. Formulas
16. Copyright


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BOOK 3 – EQUITY
Readings and Learning Outcome Statements
Study Session 9 – Equity Valuation: Valuation Concepts
Study Session 10 – Equity Valuation: Industry and Company Analysis and Discounted
Dividend Valuation
Study Session 11 – Equity Valuation: Free Cash Flow and Other Valuation Models
Self-Test – Equity Valuation
Formulas

X VY

READINGS AND LEARNING OUTCOME STATEMENTS
READINGS
The following material is a review of the Equity principles designed to address the
learning outcome statements set forth by CFA Institute.

STUDY SESSION 9
Reading Assignments
Equity, CFA Program Curriculum, Volume 4, Level II (CFA Institute, 2017)
27. Equity Valuation: Applications and Processes (page 1)
28. Return Concepts (page 13)

STUDY SESSION 10
Reading Assignments
Equity, CFA Program Curriculum, Volume 4, Level II (CFA Institute, 2017)
29. Industry and Company Analysis (page 35)
30. Discounted Dividend Valuation (page 62)

STUDY SESSION 11
Reading Assignments
Equity, CFA Program Curriculum, Volume 4, Level II (CFA Institute, 2017)
31. Free Cash Flow Valuation (page 108)
32. Market-Based Valuation: Price and Enterprise Value Multiples (page 154)
33. Residual Income Valuation (page 200)
34. Private Company Valuation (page 232)

LEARNING OUTCOME STATEMENTS (LOS)

STUDY SESSION 9


X VY

The topical coverage corresponds with the following CFA Institute assigned
reading:
27. Equity Valuation: Applications and Processes
The candidate should be able to:
a. define valuation and intrinsic value and explain sources of perceived
mispricing. (page 1)
b. explain the going concern assumption and contrast a going concern value to
a liquidation value. (page 2)
c. describe definitions of value and justify which definition of value is most
relevant to public company valuation. (page 2)
d. describe applications of equity valuation. (page 2)
e. describe questions that should be addressed in conducting an industry and
competitive analysis. (page 4)
f. contrast absolute and relative valuation models and describe examples of
each type of model. (page 5)
g. describe sum-of-the-parts valuation and conglomerate discounts. (page 6)
h. explain broad criteria for choosing an appropriate approach for valuing a
given company. (page 7)
The topical coverage corresponds with the following CFA Institute assigned
reading:
28. Return Concepts
The candidate should be able to:
a. distinguish among realized holding period return, expected holding period
return, required return, return from convergence of price to intrinsic value,

discount rate, and internal rate of return. (page 13)
b. calculate and interpret an equity risk premium using historical and forwardlooking estimation approaches. (page 15)
c. estimate the required return on an equity investment using the capital asset
pricing model, the Fama–French model, the Pastor–Stambaugh model,
macro-economic multifactor models, and the build-up method (e.g., bond
yield plus risk premium). (page 19)
d. explain beta estimation for public companies, thinly traded public
companies, and nonpublic companies. (page 24)
e. describe strengths and weaknesses of methods used to estimate the
required return on an equity investment. (page 26)
f. explain international considerations in required return estimation. (page 26)
g. explain and calculate the weighted average cost of capital for a company.
(page 27)


h. evaluate the appropriateness of using a particular rate of return as a
discount rate, given a description of the cash flow to be discounted and
other relevant facts. (page 27)

STUDY SESSION 10
The topical coverage corresponds with the following CFA Institute assigned
reading:
29. Industry and Company Analysis
The candidate should be able to:
a. compare top-down, bottom-up, and hybrid approaches for developing
inputs to equity valuation models. (page 35)
b. compare “growth relative to GDP growth” and “market growth and market
share” approaches to forecasting revenue. (page 35)
c. evaluate whether economies of scale are present in an industry by analyzing
operating margins and sales levels. (page 36)

d. forecast the following costs: cost of goods sold, selling general and
administrative costs, financing costs, and income taxes. (page 36)
e. describe approaches to balance sheet modeling. (page 39)
f. describe the relationship between return on invested capital and competitive
advantage. (page 40)
g. explain how competitive factors affect prices and costs. (page 40)
h. judge the competitive position of a company based on a Porter’s five forces
analysis. (page 40)
i. explain how to forecast industry and company sales and costs when they are
subject to price inflation or deflation. (page 41)
j. evaluate the effects of technological developments on demand, selling
prices, costs, and margins. (page 43)
k. explain considerations in the choice of an explicit forecast horizon. (page 44)
l. explain an analyst’s choices in developing projections beyond the short-term
forecast horizon. (page 45)
m. demonstrate the development of a sales-based pro forma company model.
(page 46)
The topical coverage corresponds with the following CFA Institute assigned
reading:
30. Discounted Dividend Valuation
The candidate should be able to:


a. compare dividends, free cash flow, and residual income as inputs to
discounted cash flow models and identify investment situations for which
each measure is suitable. (page 62)
b. calculate and interpret the value of a common stock using the dividend
discount model (DDM) for single and multiple holding periods. (page 65)
c. calculate the value of a common stock using the Gordon growth model and
explain the model’s underlying assumptions. (page 68)

d. calculate and interpret the implied growth rate of dividends using the
Gordon growth model and current stock price. (page 69)
e. calculate and interpret the present value of growth opportunities (PVGO)
and the component of the leading price-to-earnings ratio (P/E) related to
PVGO. (page 70)
f. calculate and interpret the justified leading and trailing P/Es using the
Gordon growth model. (page 71)
g. calculate the value of noncallable fixed-rate perpetual preferred stock. (page
73)
h. describe strengths and limitations of the Gordon growth model and justify
its selection to value a company’s common shares. (page 74)
i. explain the assumptions and justify the selection of the two-stage DDM, the
H-model, the three-stage DDM, or spreadsheet modeling to value a
company’s common shares. (page 75)
j. explain the growth phase, transitional phase, and maturity phase of a
business. (page 78)
k. describe terminal value and explain alternative approaches to determining
the terminal value in a DDM. (page 79)
l. calculate and interpret the value of common shares using the two-stage
DDM, the H-model, and the three-stage DDM. (page 80)
m. estimate a required return based on any DDM, including the Gordon growth
model and the H-model. (page 85)
n. explain the use of spreadsheet modeling to forecast dividends and to value
common shares. (page 88)
o. calculate and interpret the sustainable growth rate of a company and
demonstrate the use of DuPont analysis to estimate a company’s
sustainable growth rate. (page 89)
p. evaluate whether a stock is overvalued, fairly valued, or undervalued by the
market based on a DDM estimate of value. (page 91)

STUDY SESSION 11


The topical coverage corresponds with the following CFA Institute assigned
reading:
31. Free Cash Flow Valuation
The candidate should be able to:
a. compare the free cash flow to the firm (FCFF) and free cash flow to equity
(FCFE) approaches to valuation. (page 110)
b. explain the ownership perspective implicit in the FCFE approach. (page 111)
c. explain the appropriate adjustments to net income, earnings before interest
and taxes (EBIT), earnings before interest, taxes, depreciation, and
amortization (EBITDA), and cash flow from operations (CFO) to calculate
FCFF and FCFE. (page 111)
d. calculate FCFF and FCFE. (page 118)
e. describe approaches for forecasting FCFF and FCFE. (page 122)
f. compare the FCFE model and dividend discount models. (page 123)
g. explain how dividends, share repurchases, share issues, and changes in
leverage may affect future FCFF and FCFE. (page 123)
h. evaluate the use of net income and EBITDA as proxies for cash flow in
valuation. (page 123)
i. explain the single-stage (stable-growth), two-stage, and three-stage FCFF and
FCFE models and select and justify the appropriate model given a company’s
characteristics. (page 124)
j. estimate a company’s value using the appropriate free cash flow model(s).
(page 127)
k. explain the use of sensitivity analysis in FCFF and FCFE valuations. (page 134)
l. describe approaches for calculating the terminal value in a multistage
valuation model. (page 135)
m. evaluate whether a stock is overvalued, fairly valued, or undervalued based

on a free cash flow valuation model. (page 135)
The topical coverage corresponds with the following CFA Institute assigned
reading:
32. Market-Based Valuation: Price and Enterprise Value Multiples
The candidate should be able to:
a. distinguish between the method of comparables and the method based on
forecasted fundamentals as approaches to using price multiples in
valuation, and explain economic rationales for each approach. (page 154)
b. calculate and interpret a justified price multiple. (page 156)
c. describe rationales for and possible drawbacks to using alternative price
multiples and dividend yield in valuation. (page 156)


X VY

d. calculate and interpret alternative price multiples and dividend yield. (page
156)
e. calculate and interpret underlying earnings, explain methods of normalizing
earnings per share (EPS), and calculate normalized EPS. (page 162)
f. explain and justify the use of earnings yield (E/P). (page 164)
g. describe fundamental factors that influence alternative price multiples and
dividend yield. (page 165)
h. calculate and interpret the justified price-to-earnings ratio (P/E), price-tobook ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on
forecasted fundamentals. (page 165)
i. calculate and interpret a predicted P/E, given a cross-sectional regression on
fundamentals, and explain limitations to the cross-sectional regression
methodology. (page 169)
j. evaluate a stock by the method of comparables and explain the importance
of fundamentals in using the method of comparables. (page 171)
k. calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in

relative valuation. (page 174)
l. calculate and explain the use of price multiples in determining terminal value
in a multistage discounted cash flow (DCF) model. (page 175)
m. explain alternative definitions of cash flow used in price and enterprise
value (EV) multiples and describe limitations of each definition. (page 176)
n. calculate and interpret EV multiples and evaluate the use of EV/EBITDA.
(page 177)
o. explain sources of differences in cross-border valuation comparisons. (page
179)
p. describe momentum indicators and their use in valuation. (page 180)
q. explain the use of the arithmetic mean, the harmonic mean, the weighted
harmonic mean, and the median to describe the central tendency of a group
of multiples. (page 181)
r. evaluate whether a stock is overvalued, fairly valued, or undervalued based
on comparisons of multiples. (page 171)
The topical coverage corresponds with the following CFA Institute assigned
reading:
33. Residual Income Valuation
The candidate should be able to:
a. calculate and interpret residual income, economic value added, and market
value added. (page 200)
b. describe the uses of residual income models. (page 203)