Economic Value Added

In corporate finance, Economic Value Added or EVA is an estimate of a firm's economic profit -
being the value created in excess of the required return of the company's shareholders - where
EVA is the profit earned by the firm less the cost of financing the firm's capital. The idea is that
shareholders gain when the return from the capital employed is greater than the cost of that
capital; see corporate finance: working capital management. This amount can be determined,
among other ways, by making adjustments to GAAP accounting, including deducting the
opportunity cost of equity capital.

Calculating EVA

EVA is Net Operating Profit After Taxes (or NOPAT) less the money cost of capital. Any value
obtained by employees of the company or by product users is not included in the calculations.
The basic formula is:

where:

  , is the Return on Invested Capital (ROIC);

  is the Weighted Average Cost of Capital (WACC);

  is capital employed;

 NOPAT is the Net Operating Profit After Tax, with adjustments and translations for the
amortization of goodwill, the capitalization of brand advertising and others.

EVA Calculation

EVA = (r-c) x Capital

EVA = (r x Capital) – (c x Capital)

EVA = (NOPAT- c x Capital

EVA = operating profits – a capital charge

where: r = rate of return, and

c = cost of capital, or the weighted average cost of capital.

NOPAT is profits derived from a company’s operations after taxes but before financing costs and
noncash-bookkeeping entries. It is the total pool of profits available to provide a cash return to
those who provide capital to the firm.

Capital is the amount of cash invested in the business, net of depreciation. It can be calculated as
the sum of interest-bearing debt and equity or as the sum of net assets less noninterest-bearing
current liabilities.

Capital charge is the cash flow required to compensate investors for the riskiness of the business
given the amount of capital invested.

The cost of capital is the minimum rate of return on capital required to compensate debt and
equity investors for bearing risk.

Another perspective on EVA can be gained by looking at a firm’s Return on Net Assets
(RONA). RONA is a ratio that is calculated by dividing a firm’s NOPAT by the amount of
capital it employs (RONA = NOPAT/Capital) after making the necessary adjustments of the data
reported by a conventional financial accounting system.

EVA = (Net Investments)(RONA – Required minimum return)

If RONA is above the threshold rate, EVA is positive.

Market value added

From Wikipedia, the free encyclopedia

Market Value Added (MVA) is the difference between the current market value of a firm and
the capital contributed by investors. If MVA is positive, the firm has added value. If it is
negative, the firm has destroyed value. The amount of value added needs to be greater than the
firm's investors could have achieved investing in the market portfolio, adjusted for the leverage
(beta coefficient) of the firm relative to the market.

The formula for MVA is:

where:

 MVA is market value added

 V is the market value of the firm, including the value of the firm's equity and debt

 K is the capital invested in the firm

MVA is the present value of a series of EVA values. MVA is economically equivalent to the
traditional NPV measure of worth for evaluating an after-tax cash flow profile of a project if
the cost of capitalis used for discounting.

NOPAT

In corporate finance, net operating profit after tax or NOPAT is a company's after-tax operating
profit for all investors, including shareholders and debt holders.[1] It is equal to NOPLAT and is
defined as follows[2]:

NOPAT = Operating profit x (1 - Tax Rate)

An alternative formula is as follows[3]

NOPAT = Net Profit After Tax + after tax Interest Expense – after tax Interest Income

For companies with no debt and thus no interest expense, NOPAT is equal to net profit. In other
words, NOPAT represents the company's operating profit that would accrue to shareholders
(after taxes) if the company had no debt.[2]

Another fully equivalent expression is

NOPAT = AdjEBIT - CashOpTax

where:

AdjEBIT represents adjusted earnings before interest and taxes (adjusted EBIT)

CashOpTax represents cash operating taxes.

or

NOPAT = (1-Tax Rate)* EBIT

NOPAT is frequently used in calculations of Economic value added and Free cash flow
numerical example
Financing approach

Net income 500

- Interest income after taxes 50

Total profit after tax 450

+ Interest expense after taxes 100

NOPAT 550