Testing the Residual Income Valuation Model in a Nascent Stock Market: The Case of Nairobi Securities Exchange
Beth W. Kariuki, L. A. Oyugi

Abstract
This study sought to determine the intrinsic value of the Nairobi Securities Exchange (NSE) Limited using the residual income valuation method. Data was obtained from the financial statements of companies in NSE20-share index and the Central Bank of Kenya annual report from year 1998 to year 2011. A time series regression model was used to forecast returns on equity, earnings per share and book values of equity. The intrinsic value of the index was computed and compared with the reported (market) index value. Our results show that the residual income model is capable of valuing the NSE index with a good degree of accuracy. However, the residual income model has very weak predictive power.

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