Please can someone explain why RI = E - rB ?? The curriculum doesn’t give much explanation as well. Also, whats the difference between cost of equity (ke) and required rate of return ® ?
Residual income is the income you earn after accounting for the cost of equity; therefore, it’s net income (earnings, or E) minus the equity charge, and the equity charge is the required rate of return (r, the same as ke) times the beginning book value (B). Thus,
RIt = Et − rBt-1
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Thank you!
My pleasure.