When calculating RI: when we use NOPAT: RI = NOPAT - (Cost of Equity x Equity) when we use EBIT: RI = EBIT(1-t) - (Cost of Capital x WACC) or are they both adjusted for COC, i.e. COC x WACC?

That is EVA for your second equation, not RI. It should read: EBIT(1-t) - (Invested Capital*WACC)

yep. and EBIT(1-t) = NOPAT. same thing.

I am confused. Residual Income is just NI - (Beginning Equity * Cost of Equity)

That is what I was thinking.

Niblita75 Wrote: ------------------------------------------------------- > I am confused. Residual Income is just NI - > (Beginning Equity * Cost of Equity) NI inherently already has the cost to the debtholders embeeded in the form of interest expense so only an equity charge is needed to get to econmic income

oh i was saying yep to nib. and i thought we were talking about eva, too.

Both are EVA measures not residual income: NOPAT - $WACC EBIT(1-t) - $WACC or NOPAT - (Invested Capital*WACC) EBIT(1-t) - (Invested Capital*WACC)

Neither of those formulas are correct. RI = NI - Re(BV Equity t-1) RI = (ROE - Re)(BV Equity t-1) The formulas above: EVA= NOPAT - $WACC NOPAT - (Re)(BV Equity t-1) = ? … not RI because NOPAT <> Net Income

damn i keep mixing them up!!! so RI = NI - (Beginning Equity * Cost of Equity) … right?

Absolutely

Yep.

I swear I tried the second version of this in the CFA text questions and couldn’t get the right answer with that formula…anyone else have any problems or am I going crazy RI = NI - Re(BV Equity t-1) RI = (ROE - Re)(BV Equity t-1)

Isn’t it RI = [(Roe-r)/(r-g)]*Bk value at time-1?

CFAdummy Wrote: ------------------------------------------------------- > Isn’t it RI = [(Roe-r)/(r-g)]*Bk value at time-1? i think u are trying to look for the value using RI for that equation… and the equation is Value(RIM) = ((Roe- r)/ r-g )B0 +B0