Definition
Residual income measures profit after deducting the opportunity cost of equity. Unlike EVA which uses total capital, residual income focuses on equity returns. Positive residual income indicates returns above shareholders' required rate, creating value.
Formula
Residual Income = Net Income - (Equity × Cost of Equity)
Example
Net income of $30M with $200M equity at 12% required return: RI = $30M - ($200M × 12%) = $6M. Shareholders earn $6M above their required return.
FAQ
What is Residual Income?
Net income minus a charge for the cost of equity capital.
How do you calculate Residual Income?
A common formula for Residual Income is: Residual Income = Net Income - (Equity × Cost of Equity)
Why is Residual Income important?
Residual Income helps investors evaluate profitability and make more informed decisions.