Measuring Economic Value Added (EVA)

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

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 7.03%
1.00 $250.00 $250.00 Total Reserve Ratio 9.23%
Total $4,550.00

B. Income Statement
Interest Income Interest Expense Net Interest Income
Rate Asset Amount Rate Asset Amount
6.50% $800.00 $52.00 3.00% $1,800.00 $54.00
9.00% $2,000.00 $180.00 5.50% $1,300.00 $71.50 Income
10.00% $1,900.00 $190.00 4.50% $680.00 $30.60 Expense
Total $422.00 Total $156.10 Net Income
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 charge write-offs
Net Income $66.54 Cash taxes paid
Equity Capital $320.00 Capital charge (OCC)
ROE: 20.79% =($66.54)÷ $320.00 llocated Risk Capital (ARC)
2 Return on Assets (ROA) Net Operating Profit After Taxes (NOPAT)
Net Income $66.54 Pre-Tax Income
Assets $5,000.00 Provision for Loan Losses
ROA 1.33% =($66.54)÷ $5,000.00 Net charge write-offs
Cash taxes paid
3 NOPAT:
Economic Value Added (EVA)
NOPAT $74.90
Opportunity Cost of Capital (OCC) 12.00%
Allocated Risk Capital (ARC) $550.00
4 EVA: $8.90 ### (12.00%)X $550.00
n's net operating profit
harge is the required

he historical amount
asure these variables

tockholder equity

tandard GAAP
apital from all sources.

$Millions Rate
$800.00
$1,800.00 3.00%
$1,300.00 5.50%
$680.00 4.50%
$100.00
$320.00
$5,000.00

$320.00
$420.00

=($320.00)÷ $4,550.00
=($420.00)÷ $4,550.00

t Interest Income

$422.00
$156.10
$265.90
-$25.00
$60.00
-$190.00
$110.90
 $44.36
$66.54

$22.00
$39.00
12.00%
$550.00 (by assumption)
rofit After Taxes (NOPAT)
$110.90
$25.00
-$22.00
-$39.00
$74.90