How this calculator works
Deduct an equity opportunity-cost charge from accounting net income. Use beginning book equity and a required equity return covering the same period as income. A positive result means earnings exceed that equity charge; a negative result means they fall short. It is an earnings measure, not cash available for distribution.
Formula
Equity charge = beginning book equity × cost of equity. Residual income = net income - equity charge.
Worked example
$150,000 net income on $1,000,000 beginning equity at a 10% required return gives a $100,000 charge and $50,000 residual income. At $80,000 income, residual income is -$20,000.
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Frequently asked questions
How does this differ from EVA?
This measure charges for common equity after interest expense is already included in net income. EVA starts with operating profit and charges for all invested capital.
Which equity value belongs here?
Use beginning book equity for the period, not market capitalization.
Can I value a stock with one period of residual income?
A full valuation also needs future residual income forecasts, a discount rate and beginning book value. This tool measures one period only.