| In recent year, two new approaches, residual income model (RIM) and the economic value added (EVA), have become very popular. Supporters claim the RIM and EVA are superior to the DCF methods. The RIM has become very popular in valuation because it purports to measure value added by explicit taking into account the cost for capital in the income statement. Although, several people say, there are different ways to value cash flows. First, we can apply the standard after-tax WACC to the free cash flow (FCF), or (second) we apply the adjusted WACC to the FCF, or (third) we apply the WACC to the capital cash flow (CCF), or (forth) we discounted the cash flow to equity (CFE) with the appropriate returns to levered equity. These ways are known as discounted cash flow (DCF) methods. On the other side, the others say, there are ten methods and nine theories to valuate the firms. In this paper, I test the equivalence of the RIM and the DCF method by using the simple numerical example in the simple of income statement, and free cash flow statement and then calculate the residual income. I examine the idea that the RIM shows that in a MM world, the two approaches (levered approach means using debt in financing and unlevered approach means not to use a debt in financing) to valuation are equivalent of the RIM and DCF methods. The result is the DCF method and the RIM are equivalent. |