Answer: less the cost of equity.

## Explanation **Residual Income Definition:** Residual income is calculated as: \[ \text{Residual Income} = \text{Net Income} - (\text{Equity Capital} \times \text{Cost of Equity}) \] **Key Points:** - **Option B: Less the cost of equity** - This is the correct definition. Residual income represents the income that remains after deducting the opportunity cost of equity capital from net income. - **Option A: Plus dividends** - This is incorrect. Dividends are distributions to shareholders, not an addition to net income in the residual income calculation. **Conceptual Understanding:** Residual income measures whether a company is earning returns above its cost of equity capital. It shows the economic profit or value created for shareholders after accounting for the minimum required return on their investment. The cost of equity represents the opportunity cost - what investors could earn by investing in securities with similar risk profiles.

Author: LeetQuiz Editorial Team