THE EFFECTS OF INVESTMENTS ON RESIDUAL INCOME. Assume that the firm's cost of equity capital is 10 percent and that the firm's existing assets and operations generate a 10 percent return on common equity. If the firm raises additional equity capital and invests in assets that will generate a return less than 10 percent, what effect will that investment have on the firm's residual income? If the firm raises additional equity capital and invests in assets that will generate a rate of return that exceeds 10 percent, what effect will that investment have on the firm's residual income?