 In continuation of our other income mayors and valuation models, we have in the line economic profit valuation mayors, residual income mayors and claim valuation model mayors. Economic profit is basically the excess of revenue over the opportunity cost of capital of a firm for a particular or a given period of time. It is a periodic measure of profit and it can alternatively be used in measuring income of an entity. It can be used for valuing an asset or it can be used for measuring managerial performance of an entity for a certain period of time or it can be used to determine managerial compensation for the management of a given firm. To determine economic profit, we deduct the cost of capital from notepad and by notepad we mean net operating profit after tax. To determine net operating profit after tax, in fact, we deduct the tax from the earnings before interest and tax and the resulting figure is the notepad. To determine cost of capital, we multiply the firm's VAC with its capital. Net present value can be determined using economic profit when we discount economic profit over the VAC of the project. The resulting figure is the net present value on that given project. And then we can also say that the net present value is basically the present value of the future cash flows and that is equal to the market value of the firm. Dear students, on the screen, you can see the computation of economic profit. We have a project life of five years. In the first column, we have the capital, we have notepad, we have VAC and we have economic profit. Now to determine economic profit, we need to deduct the amount of VAC from notepad. The resulting figure is economic profit. Now we have economic profit of five years with zero in the first year and if we discount these five values or future economic profits over the firm's cost of capital, the resulting NPV is the amount of 69,492. When we add this 69,492, the net present value to the opening value of the firm and that was the 150,000 initial cost, the resulting figure is 219,492 and that is the total value of the firm that we have just computed by discounting the firm's economic profit over its cost of capital that is the VAC and a unique feature of this model is that the value derived by using this model is similar to the value derived by using the basic capital budgeting model. Next, we have residual income. Residual income is based on economic profit but it is more reliant on accounting conventions. It is in fact an accounting measure. It focuses on return to the equity or return to the stockholders. It is used also in measuring income, determining managerial performance or determining valuation for the assets or investment of the firm to determine residual income we need to deduct the cost of equity in absolute firm from the net income of the firm for a given period of time. There is a difference between residual income and economic profit. For residual income, we need an accounting with model of income that is the net income. For determining accounting profit, we need an adjusted variant of accounting income and that is the figure of no-pat. So in economic profit, we use no-pat net operating profit after tax or simply basically net operating profit but for residual income, we use the figure of net income. The figure by RE is the cost of equity and BT minus 1 is the opening balance of the shareholders capital or shareholders equity. To determine firm value using the residual income, we need to determine the present value of the residual income and then this figure is added to the equity and debt of the firm to determine the overall value of the firm. Let me take an example to understand the application of net income. We have again a five years model. In the first column, we have net income, we have cost of equity. The difference of these two is the residual income that is in the line three. If we discount these five years residual incomes over the cost of equity, that is our discount rate 15% now, the net present value of these five years residual income comes to 69,492. Now we have equity of 40,254 and debt of 109,746. Adding the present value of residual income to these two values of equity and debt, the full value of the firm comes to 212,492 again, this is the value that is similar to the value derived through economic profit and the value derived through the basic capital budgeting model. In the last, we have claim valuation model. We have right now three valuation approaches. We have economic profit approach that adds the present value of the economic profit to the original investment. We have the residual income approach that adds present value of the residual income to the equity and debt of the firm. Then we have a cash value approach in which the future cash flows of the firm are spread between the debt and equity holders of the firm and they are divided them separately. So we can say that we have a balance sheet structure through using the cash valuation approach. Now, how claims valuation approach fits into the balance sheet structure. We can see that the capital budgeting approach basically values the assets of a firm as a whole. Whereas the claim valuation approach values the debt and equity component of the firm and these components are appear on the right side of a balance sheet whereas assets are appear on the left side of a balance sheet. So we can say that value of assets is equal to the value of claims. To understand this phenomena, we have an example where we have cash flows for the debt holders and cash flows for the stock holders. For cash flows to the debt holders, we have two types of cash flows, interest and principal payments and we need to discount these cash flows at the cost of debt that is 8.33 percent to determine the value of the stock holders cash flows where we have the cash flows in terms of dividends and share repurchase. These two cash flows will be discounted at the cost of equity which is 15 percent. Then we have table of five years project life. In the first column we have interest payments and principal payments. These two payments are gone to the debt holders. So we have total debt payments from year one to year five. Then we have the cash flows for the distribution among the equity holders from year one to year five. When we determine present values of these two cash flows streams on their respective cost of capital as the discounting factor, an interesting thing we see that both of the elements have similar present value and the total of these two present values is 219,492. So we can again see that the claim valuation approach results the same present value of the firm that we had seen in economic profit valuation approach, in residual income approach and earlier in the basic capital budgeting approach. In little we have few others valuation approach like free cash flows to the firm same as the basic capital budgeting approach and free cash flows to the equity holders which relates to the claim valuation approach. Now question arises how practitioner do in valuation of a firm having the cash flows and various valuation approaches. Generally corporate managers value assets using their after tax cash flows and security analysts value equity by valuing the cash flows to the equity holders and another we have real estate investors they use claim valuation approach to determine the financial worth of real assets under their consideration.