Residual income is defined as the earnings for a given period minus the opportunity cost of equity holders. It can be calculated in two ways:
Residual income = net income – (equity capital x cost of equity)
Residual income = EBIT (1 – tax rate) – (total capital x WACC)
EVA is a commercial implementation of the residual income concept.
EVA = NOPAT – (C% * TC)
where,
NOPAT = company’s net profit after taxes
C% = cost of capital
TC = total capital.
MVA is based on the idea that a company must generate economic profit for its market value to increase.
MVA = Market value of the company – Accounting book value of total capital
Sign up to get more!