Economic value added

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Economic Value Added or EVA^® is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. GAAP is estimated to ignore US$300 billion in shareholder opportunity costs. EVA can be measured as Net Operating Profit After Taxes(or NOPAT) less the money cost of capital. Money cost of capital refers to the amount of money rather than the proportional rate (cost of capital). The amortization of goodwill or capitalization of brand advertising and other similar adjustments are the translations that occur to Economic Profit to make it EVA. The EVA is a registered trademark by its developer, Stern Stewart & Co.

Contents 1 Calculating EVA 2 Other measures of shareholder value 3 See also 4 References 5 External links

[edit] Calculating EVA

In the field of corporate finance, economic value added is a way to determine the value created, above the required return, for the shareholders of a company.

The basic formula is:

<math> EVA \ = \ ( r - c ) \cdot K \ = \ NOPAT - c \cdot K </math>

where

<math> r = { NOPAT \over K } </math> , called the Return on Invested Capital (ROIC).

is the firm's return on capital, NOPAT is the Net Operating Profit After Tax, c is the Weighted Average Cost of Capital (WACC) and K is capital employed.

Shareholders of the company will receive a positive value added when the return from the capital employed in the business operations is greater than the cost of that capital; see Working capital management. Any value obtained by employees of the company or by product users is not included in the calculations.

[edit] Other measures of shareholder value

• Added Value
• Market value added

[edit] See also

• Value added
• Free cash flow
• Weighted average cost of capital
• Business valuation

[edit] References

• G. Bennett Stewart III (1991). The Quest for Value. HarperCollins. 
• Stephan Hostettler, Hermann Stern. Das Value Cockpit. Wiley. 

[edit] External links

• Economic Value Added from Stern Stewart & Company
• Economic Value Added from EVA Dimensions LLC
• Economic Value Added (EVA), Prof. Aswath Damodaran
• EVA valuation tutorial from valuatum.com
• Understanding Economic Value Added, investopedia.com
• All About EVA, investopedia.com
• Economic Value Added: A simulation analysis of the trendy, owner-oriented management tool, Timo Salmi and Ilkka Virtanen, 2001

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