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Economic Value Added

The document defines economic value added (EVA) as the net operating profit after tax minus the average cost of capital employed during a period. A positive EVA means management increased company value, while a negative EVA means the cost of capital exceeded profits, decreasing company value. The document provides an example calculation of EVA for Stark Industries using net operating profit after tax, weighted average cost of capital, and average total capital employed figures.

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142 views3 pages

Economic Value Added

The document defines economic value added (EVA) as the net operating profit after tax minus the average cost of capital employed during a period. A positive EVA means management increased company value, while a negative EVA means the cost of capital exceeded profits, decreasing company value. The document provides an example calculation of EVA for Stark Industries using net operating profit after tax, weighted average cost of capital, and average total capital employed figures.

Uploaded by

Noor Mohd Azad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Economic Value Added

In finance, economic value added (EVA) measures the net value added by a company during a period. It equals net
operating profit after tax minus average cost of capital employed.
It is a concept similar to net present value. While net present value calculates total value added over the life of a
project in present value terms, the economic value added finds net value added in a single period.
If economic value added (EVA) for a period is positive, it means the management has increased the company's total
worth. On the other hand, if the economic value added is negative it means that the cost of capital employed is
greater than the profit generated by the company and this means a decline in the company's value over the period.

Formula

Economic Value Added (EVA) = Net Operating Profit after Taxes WACC Capital
Employed
Example
Stark Industries' earnings before interest and taxes for the financial year 2011 amounted to $5,130 million. Applicable
tax rate is 35%. 60% of the company's assets are financed by debt which has an after tax cost of 3.8%, while 40% is
financed by equity with a cost of 9.8%. Stark Industries average total capital employed over the period amounted to
$50,420 million. Find Stark Industries' economic value added.
Economic Value Added = NOPAT WACC Capital Employed
NOPAT = EBIT (1 Tax Rate) = $5,130 million (1 35%) = $3,334 million
WACC = 0.6 3.8% + 0.4 9.8% = 6.2%
Economic Value Added = $3,334 million 6.2% $50,420 = $208 million
This tells us that over the financial year 2011, Stark Industries added a total of $208 million to its value.

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