In present scenario the Economic Value Added(EVA) is becoming popular.
Economic Value Added definition:
EVA (Economic Value Added) is basically the excess amount left on after making a proper charge for the capital invested in the business. It different ways economic value added calculation can be done. They are,
Different types of Economic Value Added (EVA) Formula are:
1. EVA = NOPAT - C* x CAPITAL.
2. EVA = CAPITAL (r-c*)
3.EVA = [PAT + INT (1-t)] - C* CAPITAL
4.EVA = PAT- Kc EQUITY
Where,
NOPAT = Net Operating Profit After Tax.
C*= Cost of Capital
CAPITAL= Economic book value of the capital invested in the firm.
r= return on capital (NOPAT/CAPITAL)
PAT=Profit After Tax.
INT+ interest expense of the firm.
t=Marginal tax rate of the firm.
Kc= Cost of equity.
EQUITY= Equity utilized in the firm.
Important Features and Advantages of EVA Approach:
FYI: This approach was developed by Stern Stewart & Co, and later with different names like Peter Drucker referred it as "measure of total factor productivity", feature magazine as "today's hottest financial idea and getting hotter"
Economic Value Added definition:
EVA (Economic Value Added) is basically the excess amount left on after making a proper charge for the capital invested in the business. It different ways economic value added calculation can be done. They are,
Different types of Economic Value Added (EVA) Formula are:
1. EVA = NOPAT - C* x CAPITAL.
2. EVA = CAPITAL (r-c*)
3.EVA = [PAT + INT (1-t)] - C* CAPITAL
4.EVA = PAT- Kc EQUITY
Where,
NOPAT = Net Operating Profit After Tax.
C*= Cost of Capital
CAPITAL= Economic book value of the capital invested in the firm.
r= return on capital (NOPAT/CAPITAL)
PAT=Profit After Tax.
INT+ interest expense of the firm.
t=Marginal tax rate of the firm.
Kc= Cost of equity.
EQUITY= Equity utilized in the firm.
Important Features and Advantages of EVA Approach:
- It acts as performance measure which is linked to share holder value creation in all directions.
- It is useful in providing business knowledge to everyone.
- It is an efficient method for communicating to investors.
- It transforms the accounting information into economic quality which can be easily understood by non financial managers.
- It is useful in evaluating Net Present Value(NPV) of projects in capital budgeting which is contradictory to IRR.
- Instead of writing the value of firm in terms of discounted cash flow, it can be expressed in terms of EVA of projects.
FYI: This approach was developed by Stern Stewart & Co, and later with different names like Peter Drucker referred it as "measure of total factor productivity", feature magazine as "today's hottest financial idea and getting hotter"
0 comments:
Post a Comment
What do you have to say about the article. Give your opinion.