![]() Since the residual income is negative, the Maisy Grain Company is not earning enough to compensate its shareholders for the risk. Residual income = After-tax operating income - (Total Assets x WACC) = $4.536 - ($100.8 x 0.0969) = $ (5.23) million.Īs we can see, the capital charge and equity charge methods lead to the same residual income estimate. Note that in the calculation of WACC we used after-tax cost of debt, since interest expense is tax-deductible.Īfter-tax operating income = EBIT x (1 - Tax rate) = $7.56 x (1 - 0.4) = $4,536 million. WACC = Equity share x cost of equity + Debt share x cost of debt x (1 - Tax rate) Residual income = net income - equity charge = 2,823,600 - 8,059,800 = -$5,236,200.Ģ) To use the capital charge method, we need to calculate WACC first. Less: income tax expense: $1,882,400 (4706000 x 0.4).ġ) Using the equity charge method, we calculate residual income:Įquity charge = equity capital x cost of equity = 60.6 x 13.3% = $8,059,800.
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