What’s the diff btw Economic Profit and Residual Income? I always mix them up, and I just got a very simple question wrong and I’m pissed! So Economic Profit = [EBIT *(1 - Tax Rate)] - $WACC Residual Income = [NI - (Cost of Equity * Book Value)] Formula correct? Any easier way to remember the difference btw them? And also in terms of the formula for each.
Your formulas are correct. In economic profit you are calculating residual wealth of the whole company. And in RI you are calculating residual wealth of the shareholders.
compare it to the FCFF and FCFE difference… one is res. income for firm and one for shareholders indeed. EBIT is before interest, NI is after, WACC includes debt, cost of equity doesnt. Should also help remember the formulas.