Economic Value Added - Business Valuation

The video tutorial explains how to determine the value of residual income, which is the earnings exceeding expected returns based on a company's assets and investor expectations. It introduces a formula for expected earnings, which involves net profit adjusted for taxes and extraordinary items, minus the product of average operating asset value and cost of capital. The tutorial further explains how to calculate residual income, discount future cash flows to present value, and ultimately value the firm by adding excess earnings to the average operating asset valuation.

What is the primary focus of residual income in a company?

• Earnings exceeding expected returns based on assets

• The total revenue generated by the company

• The total expenses incurred by the company

• The net profit before taxes

How do you calculate expected earnings according to the video?

• Net profit minus total expenses

• Net profit plus extraordinary gains

• Net profit minus average operating asset value times cost of capital

• Net profit minus total revenue

What is the next step after calculating residual income?

• Subtracting total expenses

• Calculating total revenue

• Extrapolating excess earnings to present value

• Investing in new assets

What factor is used to bring future cash flows to present value?

• Net profit

• Discount factor based on inflation

• Total revenue

• Interest rate

How is the firm's value determined in the final section?

• By subtracting liabilities from assets

• By adding present value of excess earnings to average operating asset valuation

• By calculating total revenue

• By multiplying net profit by cost of capital