How is the residual income model of the cost of equity capital calculated?

D 1 is the expected dividend for the next year; P0 is the current market value of common stock; G refers to the annual growth rate of dividends.

The structural principle of the residual income model of equity capital cost is the same as that of common stock. The retained earnings of the company come from net profit and belong to shareholders. The capital cost of residual income is actually the opportunity cost of shareholders, that is, shareholders keep this part of income in the company, and its necessary rate of return is the same as that of common stock, so the capital cost of residual income is the same as that of common stock, but financing costs do not need to be considered in the calculation of capital cost of retained income.