Economic Value Added
Economic Value Added
Economic Value Added
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Fundamental Strategies
NOPAT
EVA Cost of capital * Capital
Capital
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FIN 591: Financial Fundamentals/Valuation 8
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See EVA Calculation in NIFTY INDEX DATA
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Rf – Risk-free rate - This is the amount obtained from investing in securities considered free from credit
risk, such as government bonds from developed countries. The interest rate of U.S. Treasury Bills is
frequently used as a proxy for the risk-free rate.
ß – Beta - This measures how much a company's share price reacts against the market as a whole. A beta of
one, for instance, indicates that the company moves in line with the market. If the beta is in excess of one,
the share is exaggerating the market's movements; less than one means the share is more stable.
Occasionally, a company may have a negative beta (e.g. a gold-mining company), which means the share
price moves in the opposite direction to the broader market.
For public companies, you can find database services that publish betas. Few services do a better job of
estimating betas than BARRA.
(Rm – Rf) = Equity Market Risk Premium (EMRP) - The equity market risk premium (EMRP) represents
the returns investors expect to compensate them for taking extra risk by investing in the stock market over
and above the risk-free rate. In other words, it is the difference between the risk-free rate and the market
rate. It is a highly contentious figure.
Many commentators argue that it has gone up due to the notion that holding shares has become more risky.
The EMRP frequently cited is based on the historical average annual excess return obtained from investing
in the stock market above the risk-free rate. The average may either be calculated using an arithmetic mean
or a geometric mean. The geometric mean provides an annually compounded rate of excess return and will
in most cases be lower than the arithmetic mean. Both methods are popular, but the arithmetic average has
gained widespread acceptance.
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CAPM: Market Return - Indian Scenario
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Average Nifty return 2010-2018 =
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slope ( NIFTY, HUL) 0.25
slope ( NIFTY, FMCG) 0.44
slope(FMCG, HUL) 0.71