EVA – Economic Value Added

Corporate Finance

EVA - Economic Value Added• Economic Value Added is a measure of economic profit. It is

calculated as the difference between the Net Operating Profit After Tax and the cost of financing the firm’s Capital.

EVA = NoPAT – CAPITAL x COST OF CAPITAL

TO DERIVE THE NOPAT VALUE

SALES- VARIABLE COST-------------------------------------

CONTRIBUTION- FIXED COST--------------------------------------

EBITAD- DEPRICIATION / AMORTIZATION- TAX--------------------------------------

NoPAT

DefinitionIn corporate finance, Economic Value Added or EVA, is an estimateof a firm's economic profit - being the value created in excess of the

required return of the company's investors(being shareholders and debt holders).

ApplicationIt is determined to pay INCENTIVES & BONUS.

Benefits of EVA• Measurement – designing a measure of value creation that best reflects

economic reality in a particular industry.• Management—developing policies, procedures and tools which link

decision-making to the measure of value-creation.• Motivation—establishing incentive plans that simulate ownership by

giving managers a share of value created. They understand that they should be rewarded only if they create shareholder value.

Why use EVA as a performance metric?

* What separates EVA® from other performance metrics is that it measures all of the costs of running a business-operating and financing. This makes EVA® the soundest performance metric, and the one most closely aligned with the creation of shareholder value.

Adjustments• Key adjustments help translate financial statements from an accounting

framework into an economic framework• EVA method was developed by Stern & Stewart Co. and they have

recommended around 164 adjustments.

• Common adjustments include capitalization of : – Research and development – Operating leases – Brand advertising – Amortization of Goodwill etc.

Ways to increase EVA• First, the firm can grow the business by investing where the returns

exceed the WACC. • Second, the firm can improve the operating efficiencies on its existing

Capital, thereby increasing the return on Capital. • Third, a firm can harvest Capital from its losing investments, where the

return is less than the WACC and has almost no hope for improving. The funds thus generated by harvesting is disgorged to the shareholders or it is used to make worthwhile investments elsewhere.

For the Sample Calculation of EVA and Adjustments please refer Excel sheet:EVA Modified

PRESENTED BY

Mitesh Naik A028Neha Kumar A029

Pradeep Mestry A032Prasad Naik A033Rainu Rawat A036Ranjeet Shah A037Ruchit Butala A039