# Residual Income& EVA

Both of them reflect economic profit, does that mean they are equal??

no RI = NOPAT - Capital charge EVA = NOPAT - Cost of Total Capital

This could be way off but… RI is a measure to equity holders and EVA is a measure to all providers of capital.

Moregreat, RI uses NI rather than NOPAT.

LanceTX Wrote: ------------------------------------------------------- > Moregreat, RI uses NI rather than NOPAT. Not necessary. you can also calc RI with alternative approach of Capital Charge Where capital charge is from perspective of all providers of capital (both Debt & Equity)

^add to that: NI reflects Int. exp deducted. while NOPAT does not…

RI=ni - (cost of equity*equity) EVA=NOPAT-(wacc*net fixed assets) nopat is EBIT*(1-t) net fixed assets is net pp&e + (CA-CL) as you can see they reflect different costs and capital

i suppose RI&EVA both calculate the profit earned deducted all capital charge as for RI, we get NI subtract debt charge as for EVA, we get NOPAT subtract debt and equity charge, so they are arriveing at the same thing, what do i miss??

anyone?

Both models use a charge to all providers of capital RI uses NI so the cost to the debt capital providers is already embedded. You then take your equity charge against it. So both providers are taken care of. EVA uses NOPAT which is before the charge for debt or equity providers. So you have to use WACC to account for both of them.

Conceptually they both measure Economic Income , so I guess in a perfect world they should be equall…anyone can confirm this? I am wondering this as well

thanks!

I feel like I should know this, but I don’t. However, I do think that I remember doing Schweser vignettes where we had to calculate both and they were NOT identical. Maybe someone else can confirm.

I just did an arbitrary numbers thing . . . they give the same answer. Debt = 100 Equity = 100 Kd = 6% Ke = 12% WACC = 6(.7)(.5) + 12(.5) = 8.1% Sales = 1000 COGS = 200 EBIT = 800 Int = 6 EBT = 794 Taxes = 238.2 NI = 555.8 RI = 555.8 - (.12*100) = 543.8 EVA = 800(.7) - 200(.081) = 543.8

I just looked back at the vignette I worked and the EVA number was different, but it was due to a different set of financials. So I would go with Nib.

Thanks!

Niblita75 Wrote: ------------------------------------------------------- > I just did an arbitray numbers thing . . . the > give the same answer. > > Debt = 100 > Equity = 100 > Kd = 6% > Ke = 12% > WACC = 6(.7)(.5) + 12(.5) = 8.1% > > Sales = 1000 > COGS = 200 > EBIT = 800 > Int = 6 > EBT = 794 > Taxes = 238.2 > NI = 555.8 > > RI = 555.8 - (.12*100) = 543.8 > EVA = 800(.7) - 200(.081) = 543.8 This makes sense conceptually. You are using the same numbers just a slightly diff model. In the first case you have the debt accounted for in NI and then apply the equity charge. In the second you start with NOPAT and apply the charge of both equity and debt (WACC). Thanks for the help Nib.

Is economic income and economic profit the same? I think I read somewhere in the forum that they shouldn’t be confused… anyone remembers this?

Economic Profit = NOPAT - \$WACC Economic Income = EBIT(1-t) + Dep - change in MV

economic income=CF-depreciation, it appears in corporate finance when we calculate to compare accounting income and economic income it is not the same thing as economic profit i suppose