when calculate RI: residual income, RI=NI current year-Equity prevous year* cost of capital. here , why Equity value is of previous year, not current year? Thanks.
Because, it is the equity charge or cost if you would…which is calculated based on beginning of period balance not ending. Ending Balance of last year = Beginning Balance of this year, hence you use BV(t-1)
i suppose the profit earned is based on previous book value, not the current one.
IIRC, there are 4 different ways to calculate RI…know them, it showed up last year.