Been trying to review all this lately. Can anyone confirm that the following is correct? Residual Income - Measures the profit a company is making after subtracting the cost of all capital RI = NI - Equity Charge RI = NI - (Equity Capital * Ke) RI = Et - (BVt-1 * r) RI = (ROE - r) * BVt-1 Economic Value Added - Commercial implementation of Residual Income EVA = NOPAT - (wacc * Invested Capital) EVA = EBIT(1-T) - ($wacc) Market Value Added - Measures value created by management since inception MVA = (MV of LT Debt & Equity) - BV of Invested Capital Economic Income - Profit realized from an investment EI = ATCF - Economic Depreciation Economic Profit - A PERIODIC measure of profit above and beyond the dollar cost of capital - RI is sometimes referred to as Economic Profit EP = NOPAT - (wacc * Invested Capital) EP = EBIT(1-T) - ($wacc) *** These notes come straight out of the CFAI texts. My question is am I right in assuming the following relationship: If Economic Profit = Residiual Income, and Economic Profit = Market Value Added, THEN: RI = EP = MVA
i dont think so. EP = nopat - $wacc RI = NI - $k first is related to the whole firm and second is related just to equity holders. so wrong there. mva is simply the npv using the ep figure. i.e. npv = mva = sum [ep / (1 + wacc)^t] so theyre actually all different.
Thanks, I agree with what you said. I just find it confusing when in the text they start referring to in similar manners.