Question
In: Finance
What is EVA and how is it calculated? What are some of its attributes? How does...
What is EVA and how is it calculated? What are some of its attributes? How does it compare with other similar metrics
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Answer:-
EVA is Economic value added - It measures the value that is added to the shareholders by the management during a given year.
The formula of the EVA = NOPAT - (WACC x total capital)
= [ EBIT x ( 1 - t ) ] - $WACC
NOPAT = Net operating after tax
WACC = Weighted average cost of capital
t = marginal tax rate
$WACC = dollar cost of capital
total capital = net working capital + net fixed assets
EVA is a metric to evaluate how profitable company projects are and serves as a reflection of management performance. The EVA can be increased by increasing revenues and by decreasing capital costs. EVA takes into account the cost of equity capital.
Market value added ( MVA)
The other similar financial metric is Market value added ( MVA) which is the difference between market value of a company's LT-debt and equity and book value of invested capital. It is typically used for companies that are larger and publicly-traded. MVA also takes into account the cost of equity.
MVA = market value - total capital
whereas,
market value = market value of equity + market value of debt
market value = share price x number of shares outstanding + market
value of debt
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