RI / EP / EI / Claims Valuation Summaries

Residual Income: Net income remaining after a charge for opportunity cost of equity capital Formula: NI - r(B) Alternative: (ROE - r)B Valuation: NPV of RI plus book = Company Value Economic Profit: Net operating profit after a charge for cost of all forms of capital Formula: NOPAT x $WACC Alternative: EBIT(1-t) x (WACC x Invested Capital) *Invested capital is book value of debt and book value of equity (prefs too, if exist). Valuation: NPV is called MVA. MVA plus book = Company Value Economic Income: After tax cash flows less the change in investment market value (as calculated by the change in the NPV of the investment from period to period). Claims valuation: Assesses the cash flows to bond holders (principal payments and interest) and equity holders (cash flow available to pay dividends) as two separate streams which are individually discounted by the respective capital costs and summed to get the company value.

this litle summary deserves a bump…good review mcf


ep = nopat - $wacc

You are correct – slip up in typing. it’s the income less the charge, not times the charge.

no wrries, thanks for the post