The formula to calculate the Residual Income is:
\[ \text{Residual Income} = \text{Net Income} - \text{Equity Charge} \]
The formula to calculate the Equity Charge is:
\[ \text{Equity Charge} = \text{Equity Capital} \times \text{Cost of Equity} \]
The Residual Income measures the net income that exceeds the equity charge, representing the profit remaining after accounting for the cost of equity. It helps assess the company's profitability beyond the expected returns of its shareholders.
Let's assume the following:
To calculate the Equity Charge:
\[ \text{Equity Charge} = 800,000,000 \times 12.3\% = 98,400,000 \]
To calculate the Residual Income:
\[ \text{Residual Income} = 80,520,000 - 98,400,000 = -17,880,000 \]
Therefore, the Residual Income is -$17,880,000.
