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 formula for calculating expected earnings?

How do you determine the residual income from net operating profits?

Explain how excess earnings are brought back to present value.

What role does the cost of capital play in valuing a firm?

What is meant by economic value added through operations?