do RI models double count the cost of equity? When you calculate RI for a given year, you must subtract the cost of equity from income but then you calculate the present value of RI by discounting the RIs for many years, and discounting means taking into account return for risk taken, which means you are once again taking into account the cost of equity, what do you think? TY
I think you have to look at finding the residual income using the cost of equity different from discounting those residuals at the cost of equity. To find the residual income, you take Net Income - Ke(Equity) - - - That finds the value over and above what you require. However, these residual incomes are forecasted and obviously you know that money sooner is worth more than money later. Since these residual incomes are rightfully claimed by the equity holders, they must be discounted at the cost of equity to get to what these residual incomes are actually worth in today’s terms.
JDV, take it away