Based on the following information, calculate ABC Company's residual income using equity charge method:

• At the beginning of the fiscal period: debt - $150; equity - $250.
• Net income of the period: $50.
• Cost of equity: 15%.
• Cost of debt: 6%.
• Marginal tax rate: 35%.

Correct Answer: Equity charge = Cost of equity % x Book Value of Equity = 0.15 x $250 = $37.5.

It is essentially an adjustment of net income to reflect cost of all sources of capital, including equity.

RI = Net Income - Equity Charge = $50 - $37.5 = $12.5.