#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Economic income does not subtract the cost of debt financing, and it is based on the changes in the market value of the company, not changes in its book value (accounting depreciation).
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3. BASIC PRINCIPLES OF CAPITAL BUDGETING net income. (No subtraction is made for the cost of equity financing in arriving at accounting net income.) Accounting net income also differs from economic income, which is the cash inflow plus the change in the market value of the company. <span>Economic income does not subtract the cost of debt financing, and it is based on the changes in the market value of the company, not changes in its book value (accounting depreciation).
In assumption 5 above, we referred to the rate used in discounting the cash flows as the “required rate of return.” The required rate of return is the discount rate Summary
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