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    Focused Finance & Eva: Naina Adarsh Tanvi Chaudhary Pushpak Roy Manishwar

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    Naina Singh Adarsh
    This document discusses economic value added (EVA) and its relationship to market value added (MVA). It defines EVA as economic profit, which is the difference between revenues and costs including the cost of capital. EVA focuses management on decisions that increase long-term shareholder value by looking at both accounting profits and the opportunity cost of invested capital. The document also defines related terms like net operating profit after tax (NOPAT), operating capital, weighted average cost of capital (WACC), capital charge, and their roles in calculating EVA. It explains that consistently positive EVA leads to increases in MVA over time as future EVAs are discounted back to their present value.

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    Focused Finance & Eva: Naina Adarsh Tanvi Chaudhary Pushpak Roy Manishwar

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    Naina Singh Adarsh
    33 views23 pages
    This document discusses economic value added (EVA) and its relationship to market value added (MVA). It defines EVA as economic profit, which is the difference between revenues and costs including the cost of capital. EVA focuses management on decisions that increase long-term shareholder value by looking at both accounting profits and the opportunity cost of invested capital. The document also defines related terms like net operating profit after tax (NOPAT), operating capital, weighted average cost of capital (WACC), capital charge, and their roles in calculating EVA. It explains that consistently positive EVA leads to increases in MVA over time as future EVAs are discounted back to their present value.

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    Eva Mva

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    Eva Mva

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    This document discusses economic value added (EVA) and its relationship to market value added (MVA). It defines EVA as economic profit, which is the difference between revenues and costs including the cost of capital. EVA focuses management on decisions that increase long-term shareholder value by looking at both accounting profits and the opportunity cost of invested capital. The document also defines related terms like net operating profit after tax (NOPAT), operating capital, weighted average cost of capital (WACC), capital charge, and their roles in calculating EVA. It explains that consistently positive EVA leads to increases in MVA over time as future EVAs are discounted back to their present value.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    33 views23 pages

    Focused Finance & Eva: Naina Adarsh Tanvi Chaudhary Pushpak Roy Manishwar

    Uploaded by

    Naina Singh Adarsh
    This document discusses economic value added (EVA) and its relationship to market value added (MVA). It defines EVA as economic profit, which is the difference between revenues and costs including the cost of capital. EVA focuses management on decisions that increase long-term shareholder value by looking at both accounting profits and the opportunity cost of invested capital. The document also defines related terms like net operating profit after tax (NOPAT), operating capital, weighted average cost of capital (WACC), capital charge, and their roles in calculating EVA. It explains that consistently positive EVA leads to increases in MVA over time as future EVAs are discounted back to their present value.

    Copyright:

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    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 23

    Focused Finance & EVA

    Naina Adarsh Tanvi Chaudhary Pushpak Roy Manishwar

    Focused Finance

    EVA & Wealth Creation

    Warren Buffet: We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. Translation: Ultimate test of any companys success lies in increasing its market value by more than it increases its capital.

    View of the Firm


    Market Valued Balance Sheet Liabilities Equity Value of firm = Value of Liabilities + Value of Equity That is the amount of invested capital Market value of a company reflects: Earning power of invested assets Present value of current operations Present value of expected improvement in operating performance. Assets

    What is Required to Focus?


    Tie

    performance methods to capital budgeting techniques:

    Economic value added (EVA) Market value added (MVA) Focus on:
    Decisions

    Want

    to gauge managements performance


    made in the past to help project the future.

    Links to NPV

    Market Value Added


    Premium Market value added

    Total market value

    Debt & equity capital

    Investment In Company

    What is EVA?
    EVA

    = Economic profit Not the same as accounting profit


    Difference

    between revenues and costs

    include not only expenses but also cost of capital Economic profit adjusts for distortions caused by accounting methods
    Doesnt have

    Costs

    to follow GAAP

    advertising, restructuring costs, ... Cost of capital accounted for explicitly


    Rate

    R&D,

    of return required by suppliers of a firms debt and equity capital Represents minimum acceptable return.

    What is Cost of Capital


    Evaluation

    of profitability should also consider the lost opportunity that the capital has. A company has Invested capital. This could make a return elsewhere. Before fully evaluating the profitability allowance for the cost of this capital should be considered. This represents an opportunity cost.

    Market Value Added


    MVA = Present value of all future EVA Expected improvement in EVA MVA Total market value Debt & Current level equity of EVA capital

    10

    Components of EVA
    NOPAT
    Net Net

    operating profit after tax

    Operating

    capital

    operating working capital, goodwill, and other operating assets

    Cost

    of capital
    cost of capital %

    Weighted average

    Capital
    Cost

    charge value added


    the capital charge.

    of capital % * operating capital

    Economic

    NOPAT less

    11

    Explicit Vs. Implicit Costs


    Explicit

    costs are direct attributable costs like materials or labour used in production. Implicit costs or otherwise known as opportunity costs are those costs that are the result of losing an alternative use. Example: If I have 1m to invest in a company, I lose the opportunity to leave it in the bank earning interest of say 5%.

    12

    What is NOPAT?
    Net sales (-)Cost of sales (-)Depreciation (-)Selling &Admin exp Net Operating profit (-)Taxes @ 40% NOPAT 150,000 135,000 2,000 7,000 6,000 2,400 3,600

    Excludes financing charges

    13

    What is Operating Capital?


    Capital:
    Asset

    Net operating assets adjusted for certain accounting distortions


    write-downs, restructuring charges,

    Net

    operating assets:

    Cash,

    receivables, inventory, pre-paid expenses Trade payable, accruals, deferred taxes Net property, plant, and equipment
    Exclude

    non-operating assets:

    Marketable securities, investments,...

    14

    What is Cost of Capital?


    The

    cost of capital is the total % cost of debt and equity that finances the business. Weighted average cost of capital (WACC) consists of:
    Cost of debt after taxes
    = Market interest rate x (1 tax rate)

    Cost of equity = Risk-free rate + beta x (market risk premium) WACC = Cost of debt after taxes x % debt + cost of equity x % equity where % debt + % equity = 100%.

    15

    What is the Capital Charge?


    Represents

    a rental charge for the use of the operating

    capital Minimum rate of return the operating capital should earn Calculated as the firms weighted average cost of capital % x invested capital. It represents the opportunity cost of capital

    16

    Calculating EVA
    NOPAT/Average capital = Return on invested operating capital (ROIC) - Weight average cost of capital (WACC) = Spread (= ROIC - WACC) * Operating capital = Economic value added (EVA) Net operating profit after tax (NOPAT) - Capital charge (= WACC * Capital) = Economic value added (EVA)

    17

    Whats Affecting EVA?


    Sales Operating expenses Taxes = NOPAT = EVA Capital charge Market potential COGS, SG&A + Other Potential govt actions

    18

    Forward Looking Relationship for EVA & MVA


    EVA Year 1 EVA Year 2 EVA EVA Year 3 .... Year n

    Market value

    Market Value

    MVA MVA
    EVA + EVA + 1+r (1 + r)2 EVA + ... + EVA (1 + r)3 (1 + r)n

    Capital Market value is based on establishing the


    economic investment made in the company (capital), making a best guess about what economic profits (EVA) will happen in the future, and discounting those EVAs to the present to get market value added.

    19

    EVA Drives MVA


    Companies that consistently earn profits in excess of their required return ... EVA NOPAT Charge

    are typically valued at premiums to book value.


    Market Value
    Capital

    MVA

    20

    Manufacturing EVA Drivers


    Reduce

    inventory Reduce cycle time Improve yields Reduce scrap/waste Maximize labor efficiencies Improve vendor efficiencies Process improvements

    21

    Staff EVA Drivers


    Work

    group/process simplification Consistency monitors audit Centralizing resources/synergies Best practices benchmarking Insourcing/outsourcing decisions Simplify EVA measurements/reporting Ensure compliance with legislation

    22

    Marketing EVA Drivers


    Increase

    market share / revenue New markets More focused channel programs Voice of customer / consumer Leverage advertising / promotion Build brand awareness

    23

    THANK YOU

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