OK to clear this up (tell me if I’m right): EVA=Residual Income NPV=sum of RI discounted at the cost of equity, and/or NPV=MVA MVA=Economic Profit discounted at the WACC, but MVA also equals market value-invested capital. So confusing to memorize. -Richard
Wait so EVA=Economic Profit And sum of EVA discounted at WACC=NPV And sum of Residual Income discounted at cost of equity=NPV But wikipedia says EVA=Residual Income http://en.wikipedia.org/wiki/Economic_value_added
technically EVA does not = Residual Income. EVA is the branding product by some company which also includes like 7 different kinds of adjustments (I didn’t bother to check, but they’re in the CFAI books). Residual Income is simply NI minus charge of equity capital. But for all purposes, the two terms are interchangeable.
yes, so think of this: residual income = abnormal earnings = EVA = economic profit. But each pair has their own subtle differences.
Residual Income = Economic Profit Not sure where you’re getting NPV = Sum of RI discounted * My understanding was that the sum of RI, discounted at r, plus Book value (@t=0) equals MV(@t=0) I don’t recall seeing any NPV references in the RI reading… could be wrong though. As for MVA=Economic Profit discounted at the WACC, I agree.
> As for MVA=Economic Profit discounted at the WACC, I agree. In Stalla and CFAI (Book 4, page 533), MVA is defined as market value added: MVA = market value of company - total capital Wher did that definition on top come from?
In corporate finance.