The formula to calculate the Abnormal Earnings is:
\[ AE = NI - EC \]
Where:
Abnormal earnings, also known as residual income, represent the amount of profit that exceeds the required return on equity. It is a measure used in financial analysis to determine the value created by a company over and above the expected return. Abnormal earnings are calculated by subtracting the equity charge (the cost of equity capital) from the net income. This metric is useful for investors and analysts to assess the performance of a company in generating returns beyond the minimum required by its equity investors.
Let's assume the following values:
Using the formula:
\[ AE = 50,000 - 30,000 = 20,000 \]
The Abnormal Earnings are $20,000.
