# RI = (NOPAT - \$WACC) = (NI - Equity charge)

what is going on? I am losing my mind with these NEVERENDING equivalences.

No. That’s wrong. EP = NOPAT - \$WACC You can get the same value of the firm if you discount back EP w/ the WACC and if you discount back RI w/ the re

EP = NOPAT - \$WACC is for a firm value RI accounts for equity values only

I think it is. Sorry I know its getting hard for all of us.

Deduct mv of debt and you divide by number of shares outstanding and then you’ll get equity value

No it is!

There are instances where they both yield the same answer. For the test, use NI-Equity Charge for RI and NOPAT - \$WACC for EP/EVA. The relationship doesn’t always hold.

\$WACC is not equity charge.

Youre right! It’s a capital charge

it’s the same thing. EVA = RI = (NOPAT - \$WACC) = (NI - Equity charge)

\$wAcc only equals equity charge if and only if there is no debt thereby making equity the only source of capital

but interest would have already been taken out before u get to NI. It’s the same thing regardless. If there’s no interest, then NOPAT = NI.

Hmmm… I don’t know anymore! Maybe the whole equation evens out because of the interest being taken out but I know that equity charge alone doesn’t equal wAcc

NOPAT = EBIT * (1-Tax Rate). If there’s no interest, then EBIT is same thing as EBT…, so the only thing left before you get to Net Income is taxes. NI = EBIT * (1-Tax Rate)…, if there’s no interest payment. Therefore, if there’s no interest payment, NOPAT = NI No interest payment, then NOPAT + Dep = Operating CF No interest payment, then NI + Dep = Operating CF

canadiananalyst Wrote: ------------------------------------------------------- > Hmmm… I don’t know anymore! Maybe the whole > equation evens out because of the interest being > taken out but I know that equity charge alone > doesn’t equal wAc It does if you have no debt. It doesn’t, if you have debt. But still, NOPAT - \$WACC is the same thing as NI - Equity Charge with or without debt.

I get it! Yaay!

Damil4real, good explaining! But be careful here, yearly RI does not necessarily equal yearly EP. In total, they do… so it’s questionable to say RI = EP.

Does it not depend on what your valuation purpose is? Remember that Residual Income has 6 yes 6 different names in the curriculum and appears in two different study sessions so it depends on what you are trying to value. Similar to DCF, are you talking about valuing common equity or a company? It is like saying that FCFF = FCFE both use the same principles of FCF but look at different things.

Just cracked my head for 1 hour over this:P RI = NI - cost of equity EVA = NOPAT - (wacc * total capital) NOPAT = NI + After tax cost of interest So in most cases they are not equal.