Dictionary - Definition of ECONOMIC VALUE ADDED

Economic value added

Corporate finance
Working capital management Cash conversion cycle Return on capital Economic value added Just In Time Economic order quantity Discounts and allowances Factoring (finance)
Capital budgeting Capital investment decisions The investment decision The financing decision
Sections Managerial finance Financial accounting Management accounting Mergers and acquisitions Balance sheet analysis Business plan Corporate action
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In corporate finance, Economic Value Added or EVA is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. GAAP is estimated to ignore US$300 billion in shareholder opportunity costs. EVA can be measured as Net Operating Profit After Taxes(or NOPAT) less the money cost of capital. Money cost of capital refers to the amount of money rather than the proportional rate (cost of capital). The amortization of goodwill or capitalization of brand advertising and other similar adjustments are the translations that occur to Economic Profit to make it EVA. The EVA is a registered trademark by its developer, Stern Stewart & Co.

Calculating EVA

In the field of corporate finance, economic value added is a way to determine the value created, above the required return, for the shareholders of a company.

The basic formula is:

$EVA \ = \ ( r - c ) \cdot K \ = \ NOPAT - c \cdot K$

where

$r = { NOPAT \over K }$ , called the Return on Invested Capital (ROIC).

is the firm's return on capital, NOPAT is the Net Operating Profit After Tax, c is the Weighted Average Cost of Capital (WACC) and K is capital employed.

Shareholders of the company will receive a positive value added when the return from the capital employed in the business operations is greater than the cost of that capital; see Working capital management. Any value obtained by employees of the company or by product users is not included in the calculations.

Relationship to Market Value Added

The firm's market value added, or MVA, is the discounted sum of all future expected economic value added:

$MVA = V - K_0 = \sum_{t=1}{\infty} { EVA_t \over (1+c)t }$

Criticism

EVA could be misleading as a wealth metric because it reflects momentary swings in the capital markets rather than inherent company performance.^{[citation needed]}

EVA is also shareholder-centric and hence of little relevance to the rest of the stake holders.^{[citation needed]}

EVA is identical to residual income, which was largely abandoned by US companies years ago (Keys, Azamhuzjaev, and Mackey, 2001).

shareholder value

Added Value
Market value added
Total Shareholder Return

References

G. Bennett Stewart III (1991). The Quest for Value. HarperCollins.
Stephan Hostettler, Hermann Stern. Das Value Cockpit. Wiley.

External links

Economic Value Added from Stern Stewart & Company
A Reading List on EVA/Value Based Management from Robert Korajczyk
Economic Value Added from EVA Dimensions LLC
Economic Value Added (EVA), Prof. Aswath Damodaran
EVA valuation tutorial from valuatum.com
Understanding Economic Value Added, investopedia.com
All About EVA, investopedia.com
Economic Value Added: A simulation analysis of the trendy, owner-oriented management tool, Timo Salmi and Ilkka Virtanen, 2001
Apples & Oranges busıness sımulatıon by Celemı

Source: adapted by the editor from Wikipedia, the free encyclopedia; from the article "Economic value added". Image Credit.

Expressions	Definition
Economic value added	Economic Value Added (EVA) is often defined as the value of an activity that is left over after subtracting from it the cost of executing that activity and the cost of having lost the opportunity of investing consumed resources in an alternative activity. In Business terms, one could calculate EVA as Income from Operations - rate of interest in sovereign debt. If sovereign debt can be considered an alternative opportunity to invest working capital and equity. The concept of Economic Profit is closely linked to EVA. However, Economic Profit is not adjusted. (references)
Source: compiled by the editor from various references; see credits.		Top

Expressions	Domain	Definition
Economic value added	Economics	Operational result after tax and minus the capital cost. Source: European Union. (references)
Source: compiled by the editor from various references; see credits.			Top

Common Expressions: ECONOMIC VALUE ADDED

Specialty Expressions: ECONOMIC VALUE ADDED

Extended Definition: Economic value added