Economic Value Added Assignment Example | Topics and Well Written Essays - 500 words

Economic nourish Added - date ExampleThere are two main types of financing for a business, debt and candor financing. When accountants calculate assoil income, they deduct the interest expense (which is the embody of the debt capital). However, the cost of the equity is not taken into account. Therefore, the net income exaggerates the sure net income in economic terms. This flaw is overcome by the EVA method.A positive EVA indicates that value is existence created i.e. value of the confederacy increases by that amount. On the other hand, a negative EVA indicates that value is decreased and the company is now worth less than the initial capital employed (which is the assets from which earnings for the year are generated). (Russell) A value of zero means a sufficient achievement because shareholders have earned a chase away that just compensates for their risk.The term Operating Capital used in the EVA formula on the last pageboy accounts for the interest-bearing debt, prefe rred and the common stock used to acquire the companys net operate assets. In easy terms, it is the capital which was used to acquire net plant and equipment plus the net current assets.EVA = (Operating capital) * (ROIC WACC) i.e. a firm adds value if its ROIC Return on Invested Capital is greater than the WACC Weighted number Cost of Capital. However, if WACC goes beyond the ROIC, then new investments in the operating capital will actually veer the firms value.EVA is an estimate of a businesss true economic profit for the year, and if differs sapiently for accounting profit. Accounting profit is basically determined without imposing any charge for the cost of equity capital and is therefore an overstatement in economic terms. However, EVA determines the residual income after accounting for all the cost of capital (debt and equity both) and provides a much better performance measure to the stakeholders.Misra, Anil and Kanwal Anil. Economic Value Added (EVA) as the most