Using NOPAT as 'income' in the residual income model is appropriate because managers do not control the choice of using debt versus equity financing for the assets invested in their division.

Question

Quizplus · Accepted Answer

This is because NOPAT (Net Operating Profit After Tax) is a measure of the division's operating performance, independent of the financing choices made by managers. It represents the after-tax profits generated by the division's assets, and is therefore an appropriate measure of the division's economic value added (EVA) in the residual income model. The choice of financing is beyond the control of divisional managers, as it is usually determined at the corporate level.

Using NOPAT as 'Income' in the Residual Income Model Is