Discuss why residual income value is relevant to common equity shareholders and explain the two roles of book value of common shareholder’s equity in the residual income valuation approach.

Residual income (RI) value is an important concept for common equity shareholders. It provides a useful way to measure the profitability of an investment and is used by investors to assess the potential return on their investments. The RI value can be calculated from the book value of common shareholder’s equity and other financial metrics, such as earnings per share (EPS), dividends per share (DPS), and price-to-book ratio (P/B).

The main reason why residual income value is relevant to common equity shareholders is that it takes into account both positive and negative elements in stock valuation. As opposed to traditional valuation approaches, which often focus solely on historical performance, RI Value looks at all available information including both current and past performance data. This approach allows investors to incorporate future expectations when assessing whether or not a particular stock might be a good fit for their portfolios.

The two roles of book value of common shareholder’s equity play in this approach are crucial. First, it serves as the basis upon which residual income can be calculated—as it represents the net asset base that forms the foundation of all subsequent returns from operations. Second, book value helps provide insight into how much money shareholders could receive if they sold off their shares during liquidation proceedings—i.e., what their “shareholder’s equity” would amount too under such circumstances. These two components form part of what makes up RI Value: namely, expected future cash flows minus total assets held by shareholders after liquidation proceedings have been taken into consideration

In essence then, RI Value offers a comprehensive method for determining potential returns on investments from both current operations as well as liquidation events—offering investors greater insight than traditional methods alone usually allow them to acquire when making decisions about their portfolios. By taking into account various factors like book value of common shareholder’s equity along with EPS and DPS figures, investors can more accurately judge whether or not investing in certain stocks will yield them good returns over time or not—giving them valuable peace-of-mind when deciding how best to allocate resources within their portfolios..