how residual income works
residual income broadly speaking is a measurement of tangential profits earned after subtracting all costs of capital related to generating that income other terms for residual income include economic value added economic profit and abnormal earnings although residual income is sometimes known as passive income side hustles can be used to boost personal residual income types of residual incomeresidual income is also a valuation method for estimating the intrinsic value of a company s common stock it accounts for the cost of capital meaning the combination of debt and equity expended to finance the company s operations the residual income valuation model values a company as the sum of book value and the present value of expected future residual income residual income in this case is the profit remaining after the deduction of opportunity costs for all sources of capital residual income is calculated as net income less a charge for the cost of capital this is known as the equity charge and is calculated as the value of equity capital multiplied by the cost of equity or the required rate of return on equity the formula is residual income net income equity chargegiven the opportunity cost of equity a company can have positive net income but negative residual income managerial accounting defines residual income for a company as the amount of leftover operating profit after paying all costs of capital used to generate the revenues it is also considered the company s net operating income or the amount of profit that exceeds its required rate of return residual income in this case may be used to assess the performance of a capital investment a team a department or a business unit the calculation of residual income is as follows residual income operating income minimum required return x operating assets in personal finance residual income is synonymous with monthly disposable income it is the total income that remains after paying all monthly debts thus residual income is often a key factor when a lender considers a loan application an adequate amount of residual income indicates that the borrower can cover the monthly loan payment 