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Economic Value Added

Economic value added (EVA) is a measure of a firm's economic profit or the value created above the required return of shareholders. EVA is calculated as net operating profit after taxes (NOPAT) minus the cost of capital. The cost of capital represents the minimum return expected by providers of debt and equity capital to the firm based on the riskiness of the business. A positive EVA means the firm generated returns higher than the cost of capital and added economic value. EVA aims to capture the true economic profit of a firm after accounting for the opportunity cost of all capital invested.

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315 views4 pages

Economic Value Added

Economic value added (EVA) is a measure of a firm's economic profit or the value created above the required return of shareholders. EVA is calculated as net operating profit after taxes (NOPAT) minus the cost of capital. The cost of capital represents the minimum return expected by providers of debt and equity capital to the firm based on the riskiness of the business. A positive EVA means the firm generated returns higher than the cost of capital and added economic value. EVA aims to capture the true economic profit of a firm after accounting for the opportunity cost of all capital invested.

Uploaded by

singhdaman
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Assignment

On
Economic value added

Submitted by :-
Submitted to:-
Damanpreet singh
MBA sec. (A)
Roll no. 16
Economic value added
In corporate finance, Economic Value Added or
EVA is an estimate of a firm's economic profit -
being the value created in excess of the required
return of the company's shareholders - where EVA
is the profit earned by the firm less the cost of
financing the firm's capital. The idea is that
shareholders gain when the return from the capital
employed is greater than the cost of that capital;
see Corporate finance: working capital
management. This amount can be determined,
among other ways, by making adjustments to
GAAP accounting, including deducting the
opportunity cost of equity capital.

Calculating EVA

EVA is Net Operating Profit After Taxes (or NOPAT) less the
money cost of capital. Any value obtained by employees of the
company or by product users is not included in the calculations.
The basic formula is:

where:
• , is the Return on Invested Capital (ROIC);
• is the Weighted Average Cost of Capital (WACC);
• is capital employed;
• NOPAT is the Net Operating Profit After Tax, with
adjustments and translations for the amortization of
goodwill, the capitalization of brand advertising and others.
EVA Calculation
EVA = (r-c) x Capital
EVA = (r x Capital) – (c x Capital)
EVA = (NOPAT- c x Capital
EVA = operating profits – a capital charge
where: r = rate of return, and
c = cost of capital, or the
weighted average cost of capital.

NOPAT is profits derived from a company’s operations after


taxes but before financing costs and noncash-bookkeeping
entries. It is the total pool of profits available to provide a cash
return to those who provide capital to the firm.
Capital is the amount of cash invested in the business, net of
depreciation. It can be calculated as the sum of interest-bearing
debt and equity or as the sum of net assets less noninterest-
bearing current liabilities.
Capital charge is the cash flow required to compensate investors
for the riskiness of the business given the amount of capital
invested.
The cost of capital is the minimum rate of return on capital
required to compensate debt and equity investors for bearing
risk.
Another perspective on EVA can be gained by looking at a
firm’s Return on Net Assets (RONA). RONA is a ratio that is
calculated by dividing a firm’s NOPAT by the amount of capital
it employs (RONA = NOPAT/Capital) after making the
necessary adjustments of the data reported by a conventional
financial accounting system.
EVA = (Net Investments)(RONA – Required minimum return)
If RONA is above the threshold rate, EVA is positive.

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