In CFAI Book 4, Reading 45, Question 5, they seem to construct a formula for residual income: Residual Income=[(NOPAT/Assets) - WACC]*(Assets) Have you seen this? Do we need to memorize it?
RI = NOPAT/Assets*Assets - WACC*Assets RI = NOPAT - WACC*IC RI = NOPAT - $WACC Now It should sound familiar?
RI = NOPAT - WACC*IC
IC = Invested Capital Mult or div anything 1st doesn’t matter. BODMAS rule of maths.
looks more like the formula for EVA not RI.
planner Wrote: ------------------------------------------------------- > looks more like the formula for EVA not RI. I think you’re right.
Yeah but I think swaption is saying that the RI and EVA answer should be the same, so it still tells you what the theoretical RI is.
CFAI Book 4, Reading 42, Question 5
Use the standard formula to calculate RI.
Untax NOPAT = (10 / 0.6) = 16.677
Deduct intrests: 16.67 - 4.5 = 12.17
Tax it. 12.17 * 0.6 = 7.302 = Net Income
Equty charge = .12 * 50 = 6.0
RI = 7.3 - 6.0 = 1.3
The results is the same but do not need to memorize formula.
Can you pla deco firm that Invested Capital here is Equity + long term debt only. It’s not the same as total asset