Economic Value Added

Summaries

EVA – Economic Value Added

= NOPAT – WACC * Invested capitals

= EBIT (1-t) – $ value of invested capitals

*** Use targeted capital structure to calculate WACC

NOPAT = Net operating profit after tax = EBIT*(1-t)

Invested capitals = net WC + net fixed assets (or Net PPE)

=BV of long-term debt + BV of equity

Operating Capital = NWC+ net PPE

Financing Capital = long-term debt + equity

NWC = CA – non-interest bearing CL (*** therefore short term debt and the current portion of long term debt is a part of invested capitals)

EVA spread = ROC – WACC = EVA/invested capital

Where ROC = NOPAT/invested capital

Enterprise value = Capital invested + MVA = Capital invested + EVA/WACC (assume perpetuity).