Two companies, A and B, have the same ROEs, but Company A has a higher residual income. Which of the following would explain this, all else equal?

Question

Quizplus · Accepted Answer

Residual income is calculated as the net income minus the equity charge (equity capital multiplied by the cost of equity). If Company A has a greater net book value, it can have a higher residual income even with the same ROE, as the equity charge would be higher, leading to a higher residual income.

Two Companies, a and B, Have the Same ROEs, but Company