In below example: Fiscal year 2007 Net income: 10 Capital spending: 6 capital structure: D/E=3/7 when calcualte the residual earnings, it is: $10-$6*0.7=$5.8 here, it already gave that capital spending is $6, why not directly subtract as $10-$6? Thanks.
Because … of that capital spending of 6$, only 0.7*6 would be financed with equity and the rest 0.3*6 i financed by debt. And for RI we need to subtract off the equity charge from the NI, hence the ans $5.8
I second that