The Residual Income Method is one of the business valuation methods under the income approach. The formula for estimating the fair market value of a business entity through the residual income method is the current book value or equity investment plus the present value of future residual income, where residual income is computed as net income less equity charge (equity charge is total equity multiplied by the cost of equity). The residual income method is most appropriate when a firm is not paying dividends or exhibits an unpredictable dividend pattern. It is also used when a firm has historic negative free cash flow but is expected to generate positive cash flows in the future. An example may be a startup or rapidly growing firm in which capital expenditure is continuously made to fuel future growth.