Residual income and Economic profit In Equity and Corp Fin.

CFA Level II
#1

EQUITY

So Residual Income and Economic Profit is Net income- Equity charge

EVA= Nopat- WACC*total capilat

CORPORATE FINANCE

Economic profit= NOPAT - WACC* total Capital

Residual Income= Net income - equity charge

can someone tell my why in the world are the names given to these formulae in each topic contradicting each other? How to figure out whether they’re talking about Economic Profit from equity or corporate finance?

#2

Os anyone else facing this proble or just me? It gets confusing to remember the formulae, Pls help. Thank you.

#3

I checked the CFAI books and since chapters are done by different authors, I think unfortunately we have to memorize what each of them meant. Good luck to us!
On the exam,
if you are in the Equity section: Economic profit is the same as residual income.
If you are at the Corp. finance section: Economic profit is equal to EVA.

#4

the corp. finance section is primarily focused on the debt+equity level of the use of capital whereas the equity section is focused on equity-level capital uses. Economic Profit in the equity section is looking at profit available for equity holders (residual income), whereas in the corp. finance section its related to profit available to all investors (hence why you use WACC)