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    Eva

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    KomalChauhan
    Economic value added (EVA) is a measure that compares a firm's net operating profit to its total cost of capital. EVA is calculated as net operating profit after tax minus the cost of capital invested in the firm multiplied by the weighted average cost of capital. Positive EVA means the firm generated returns higher than the minimum required by investors, adding economic value. Firms adopt EVA to improve performance measurement and management, though empirical research does not clearly show EVA implementation consistently raises stock prices as some adopters claim. EVA's core concept of comparing profits to capital costs intuitively appeals to managers as a way to assess value creation or destruction.

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    Eva

    Uploaded by

    KomalChauhan
    50 views2 pages
    Economic value added (EVA) is a measure that compares a firm's net operating profit to its total cost of capital. EVA is calculated as net operating profit after tax minus the cost of capital invested in the firm multiplied by the weighted average cost of capital. Positive EVA means the firm generated returns higher than the minimum required by investors, adding economic value. Firms adopt EVA to improve performance measurement and management, though empirical research does not clearly show EVA implementation consistently raises stock prices as some adopters claim. EVA's core concept of comparing profits to capital costs intuitively appeals to managers as a way to assess value creation or destruction.

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    Economic value added (EVA) is a measure that compares a firm's net operating profit to its total cost of capital. EVA is calculated as net operating profit after tax minus the cost of capital invested in the firm multiplied by the weighted average cost of capital. Positive EVA means the firm generated returns higher than the minimum required by investors, adding economic value. Firms adopt EVA to improve performance measurement and management, though empirical research does not clearly show EVA implementation consistently raises stock prices as some adopters claim. EVA's core concept of comparing profits to capital costs intuitively appeals to managers as a way to assess value creation or destruction.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    50 views2 pages

    Eva

    Uploaded by

    KomalChauhan
    Economic value added (EVA) is a measure that compares a firm's net operating profit to its total cost of capital. EVA is calculated as net operating profit after tax minus the cost of capital invested in the firm multiplied by the weighted average cost of capital. Positive EVA means the firm generated returns higher than the minimum required by investors, adding economic value. Firms adopt EVA to improve performance measurement and management, though empirical research does not clearly show EVA implementation consistently raises stock prices as some adopters claim. EVA's core concept of comparing profits to capital costs intuitively appeals to managers as a way to assess value creation or destruction.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Meaning of economic value added

    Economic value added (EVA) is an internal management performance measure that compares
    net operating profit to total cost of capital. Stern Stewart & Co. is credited with devising this
    trademarked concept.
    How it works/Example:
    Economic value added (EVA) is also referred to as economic profit.
    The formula for EVA is:
    EVA = Net Operating Profit After Tax - (Capital Invested x WACC)
    As shown in the formula, there are three components necessary to solve EVA: net operating
    profit after tax (NOPAT), invested capital, and the weighted average cost of capital
    (WACC) operating profit after taxes (NOPAT) can be calculated, but can usually be easily found
    on the corporation's income statement.
    The next component, capital invested, is the amount of money used to fund a particular project.
    We will also need to calculate the weighted-average cost of capital (WACC) if the information is
    not provided.
    The idea behind multiplying WACC and capital investment is to assess a charge for using the
    invested capital. This charge is the amount that investors as a group need to make their
    investment worthwhile.

    BASIC CONCEPT OF ECONOMIC VALUE ADDED.


    In corporate finance, Economic Value Added (EVA), is an estimate of 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). Quite simply, EVA is the profit earned by the firm less the
    cost of financing the firm's capital. The idea is that value is created when the return on the firm's
    economic capital employed is greater than the cost of that capital. This amount can be
    determined by making adjustments to GAAP accounting. There are potentially over 160
    adjustments that could be made but in practice only five or seven key ones are made, depending
    on the company and the industry it competes in.

    HOW EVA IS USED TO MEASURE PERFORMANCE.

    Economic value added (EVA), todays leading idea in corporate


    finance and one of the most talked about in business, is far from the
    newest concept. On the contrary: Earnings more than the cost of
    capital is about the oldest idea in enterprise.

    But just as Greeces glories were forgotten in the Dark Ages, to be


    rediscovered in the Renaissance, so the idea behind EVA has often
    been lost in ever darker muddles of accounting. Managers and
    investors who come upon it as if they have seen a revelation.
    Prominent corporations the feel strongly about its ability to deliver
    improved company performance. Most EVA adopters allude to
    stock price increases as an outcome of implementing EVA
    performance measurement in their companies. The two numbers
    show a remarkable tendency to move up and down together.
    However, while an individual firm may observe this EVA-stock price
    relationship the empirical research to date does not support such a
    generalization. Regardless of actual versus perceived benefits of
    stock price performance; however, companies are embracing the
    EVA philosophy with fervor.
    The idea of comparing profits with the cost of capital used to
    produce them results in a net measure showing how much value has
    been created or destroyed by the firm during the period. This is an
    intuitively appealing concept. EVA adopters appear to use some
    metrics less frequently than non adopters.

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