Economic Value Aded (EVA)

Posted in Finance, Accounting and Economics Terms, Total Reads: 1194
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Definition: Economic Value Aded (EVA)

Economic value added in the simplest terms is the operating profit in excess of the cost of capital. It gives a measure of the value created by the company after adjusting for the cost of financing i.e. the cost of raising capital via debt, equity or other means.

Formula

EVA = NOPAT- WACC*Capital

Where:

EVA : Economic Value added

NOPAT: Net Operating Profit After Tax = EBIT(1-T); EBIT : Earnings before interests and taxes, T:Tax rate

WACC : Weighted average cost of capital

WACC is generally calculated as:

Formula

WACC = wd*rd*(1-T)+we*re

Where :

wd: weight of debt in a combination of debt and equity = debt/(debt + equity)

rd: Return on the debt

we: weight of equity in a combination of debt and equity = equity/(debt+equity)

re: Return on theequity

 

Refer to the example below:

Revenues

1000000

Cost of goods sold (COGS)

600000

EBIT

400000

NOPAT= EBIT(1-T); T=40%

240000

WACC

10%

Capital

1100000

WACC*Capital

110000

EVA

130000

 

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