The Economic Value Added (EVA) : a static approach of the value creation for shareholders

EVA says that a company or division creates value for owners only when its operating income

exceeds the cost of capital employed.

Condition : ROA > WACC - or- IRR > WACC

EVA is also an important indicator used by financial analysts.

 

STARWORLD GROUP : EVA created in Year 2023

Financial structure :

	End 2023
Long term Debt	1'050
Market Value of Equity	2'244
Total of Asset	3'294

Other information of STARWORLD GROUP : Interest rate : 2.00 % ; Required rate of return for shareholders : 7,56 %; Tax rate : 30 % ; EBIT : 1'042

Method 1 : Accounting method

EBIT	1'042,0
- Interest 2.00 %	- 21,0	Long term lenders revenue
Earning Before Tax	1021,0
- Tax 30%	- 306.3	Government revenue
= Net earning	714.7
- Dividend 7,56 %	- 169.6	Shareholders revenue
EVA	545.1
EVA Year2023	16.55%	EVA / Asset

Method 2

Calculation of the WACC (after tax) :

WACC =	7,56 %	x	2'244	+	[2.00 % x 0,7]	x	1'050	= 5,60 %
			3'294				3'294

Calculation of the after-tax ROA :

ROA =	[1'042 - 30 %] x 100	= 22,14 %
	3'294

Calculation of the EVA :

Net Revenue of Asset : 22,14 % of 3'294	729,4
Cost of capital : 5,60 % of 3'294	184,3
EVA = (22,14 % - 5,60 %) x Asset	545,1

- or -

Net Revenue of Asset (the Company)	729,4
- Net cost of Debt : 1.40 % of 1'050	14.7
- Dividend : 7,56 % of 2'244	169.6
EVA	545.1

 

 

 

 

Sources :

Analysis for Financial Management, 4th edition, Robert C. Higgins, Irwin, 1995

Principles of Corporate Finance, 8th edition, Richard A. Brealey & Stewart C. Myers, McGraw-Hill

 

© ECOFINE.COM, Bernard Jaquier, Professor Emeritus & Dr Honoris Causa, Lausanne, Switzerland, 2024