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Hi Tutor,
Could you kindly explain, one of the advantages of using EVA is that it takes into account the cost of equity which is ignored in normal accounting. Does Residual income not take into account cost of equity?
Thank you.
In RI, the deduction from profits to obtain RI is: Capital employed x interest rate.
In EVA the equivalent deduction uses WACC, which includes both borrowing costs and equity costs.
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