The Role of the Cost of Capital in EVA and in Corporate Value‐Based Management

In business, economic value added (EVA) is just a special way to measure profit that is better than all other methods. EVA lets management relax its return on investment (ROI) standards where that makes sense. The key insight here is that EVA is additive. If you put a good investment into a great bu...

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Bibliographic Details
Published inCost of Capital pp. 825 - 838
Main Author Stewart, G. Bennett
Format Book Chapter
LanguageEnglish
Published Hoboken, New Jersey John Wiley & Sons, Inc 14.04.2014
Subjects
cash flow
Cost of Capital
economic value added (EVA)
net present value (NPV)
return on investment (ROI)
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Summary:In business, economic value added (EVA) is just a special way to measure profit that is better than all other methods. EVA lets management relax its return on investment (ROI) standards where that makes sense. The key insight here is that EVA is additive. If you put a good investment into a great business, the business's EVA goes up. Cash flow is not the solution to value‐based corporate management; it is a technique that makes it less effective. The present value of EVA is mathematically identical to the net present value (NPV) of projected cash flows. The key lies in how EVA is computed. The glaring weakness with EVA–it is just a money measure of economic profit, and not a ratio– new Best‐Practice EVA model that revolves around a set of three headline EVA ratios (EVA Momentum, Market‐Implied Momentum (MIM) and EVA Margin).
ISBN:1118555805
9781118555804
DOI:10.1002/9781118846780.ch33