Measuring Economic Value Added (EVA)

Economic Value Added measures performance by comparing an institution's net o

after taxes (NOPAT) with a capital charge, or opportunity cost. The capital charge is
return to stockholders based on a specific allocated risk capital amount.
Market Value Added (MVA) represents the increase in market value over the histo
of capital invested. It is equivalent to the gross profit level of the firm. To measure t
one needs an accurate measure of the cost of capital.
Capital derives from several sources. It includes funds derived from new stockho
issued, deferred (net) tax credits, non-recurring items such as restructuring charges,
unamortizede securities gains. The corresponding NOPAT thus differs from standard
measures of the cost of capital in that it reflects the weighted average cost of capita

EVA Example
A. Balance Sheet
Assets $Millions Rate Liabilities and Equity
Cash $150.00 Demand Deposits
Securities $800.00 6.50% MMDAs
Commercial Loans $2,000.00 9.00% CDs
Credit Card Loans $1,900.00 10.00% Small Time Deposits
-Loss Reserve -$100.00 Deferred Tax Credits
Other Assets $250.00 Equity
Total Assets $5,000.00 Total Liability & Equity

Risk-weighted Assets:
Weight Asset Value Tier 1 Equity Capital
0.50 $800.00 $400.00 Total Capital
1.00 $2,000.00 $2,000.00
1.00 $1,900.00 $1,900.00 Tier 1 Ratio
1.00 $250.00 $250.00 Total Reserve Ratio
Total $4,550.00

B. Income Statement
Interest Income Interest Expense
Rate Asset Amount Rate Asset
6.50% $800.00 $52.00 3.00% $1,800.00
9.00% $2,000.00 $180.00 5.50% $1,300.00
10.00% $1,900.00 $190.00 4.50% $680.00
Total $422.00 Total
Provision for Loan Losses
Noninterest Income
Noninterest Expense
Pre-Tax Income
 Taxes at 40.00% Rate
Net Income

C. Profitability Measures
1 Return on Equity (ROE)
Net Income $66.54
Equity Capital $320.00
ROE: 20.79% =($66.54)÷ $320.00
2 Return on Assets (ROA)
Net Income $66.54
Assets $5,000.00
ROA 1.33% =($66.54)÷ $5,000.00

3
Economic Value Added (EVA)
NOPAT $74.90
Opportunity Cost of Capital (OCC) 12.00%
Allocated Risk Capital (ARC) $550.00
4 EVA: $8.90 =($74.90) -
 mic Value Added (EVA)

y comparing an institution's net operating profit

unity cost. The capital charge is the required
d risk capital amount.
se in market value over the historical amount
fit level of the firm. To measure these variables

s funds derived from new stockholder equity

ms such as restructuring charges, and
NOPAT thus differs from standard GAAP
e weighted average cost of capital from all sources.

Example

abilities and Equity $Millions Rate

mand Deposits $800.00
$1,800.00 3.00%
$1,300.00 5.50%
mall Time Deposits $680.00 4.50%
ferred Tax Credits $100.00
$320.00
tal Liability & Equity $5,000.00

r 1 Equity Capital $320.00

al Capital $420.00

7.03% =($320.00)÷ $4,550.00

al Reserve Ratio 9.23% =($420.00)÷ $4,550.00

Net Interest Income

Amount
$54.00
$71.50 Income $422.00
$30.60 Expense $156.10
$156.10 Net Income $265.90
-$25.00
$60.00
-$190.00
$110.90
 $44.36
$66.54

Net charge write-offs $22.00

Cash taxes paid $39.00
Capital charge (OCC) 12.00%
Allocated Risk Capital (ARC) $550.00 (by assumption)
Net Operating Profit After Taxes (NOPAT)
Pre-Tax Income $110.90
Provision for Loan Losses $25.00
Net charge write-offs -$22.00
Cash taxes paid -$39.00
NOPAT: $74.90

(12.00%)X $550.00