Scribd Logo
Upload

Welcome to Scribd!

  • Strategic Business Planning EVA

    Uploaded by

    Asim Khan
    6 views10 pages
    The document discusses Economic Value Added (EVA) as a measure of a firm's true economic profit. EVA is calculated by taking a firm's net income and subtracting the cost of both debt and equity capital used to generate that income. A positive EVA means the firm earned more than its cost of capital, while a negative EVA means it did not. The document provides an example calculation of EVA for MBC Farms and explains how interpreting and improving a firm's EVA can help increase its overall value.

    Original Description:

    Original Title

    Creating Value

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    The document discusses Economic Value Added (EVA) as a measure of a firm's true economic profit. EVA is calculated by taking a firm's net income and subtracting the cost of both debt and equity capital used to generate that income. A positive EVA means the firm earned more than its cost of capital, while a negative EVA means it did not. The document provides an example calculation of EVA for MBC Farms and explains how interpreting and improving a firm's EVA can help increase its overall value.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    6 views10 pages

    Strategic Business Planning EVA

    Uploaded by

    Asim Khan
    The document discusses Economic Value Added (EVA) as a measure of a firm's true economic profit. EVA is calculated by taking a firm's net income and subtracting the cost of both debt and equity capital used to generate that income. A positive EVA means the firm earned more than its cost of capital, while a negative EVA means it did not. The document provides an example calculation of EVA for MBC Farms and explains how interpreting and improving a firm's EVA can help increase its overall value.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 10

    Strategic Business Planning for Commercial Producers

    Value Creation: Am I Really Creating Value?

    Strategic Business Planning for Commercial Producers

    Objectives
    Value Creation and Economic Value Added (EVA) Calculate EVA Interpret EVA

    Strategic Business Planning for Commercial Producers

    Economic Value Added (EVA)


    Economic profit A measure of value added Better than ROE as an indicator of creation of value Calculation reflects the idea that firm must earn enough to cover the cost of debt and the opportunity cost of equity before it even begins to create value

    Strategic Business Planning for Commercial Producers

    Calculation of EVA
    Less Equals Less Equals Less Equals

    Earnings Before Interest Interest Net Farm Income Labor and Management Charge Net Income Cost of Equity Capital Economic Value Added

    Strategic Business Planning for Commercial Producers

    EVA Calculation: MBC Farms Debt


    Earnings before Interest - Interest Net Farm Income - Labor and Managerial Charge = Net Income - Cost of Equity Capital Calculated (10%) on cost valuation basis $379,235 $98,716 $280,519 $150,000 $130,519 $128,736

    Strategic Business Planning for Commercial Producers

    Cost of Equity Capital


    Required Rate of Return x Net Worth Return your equity must generate to remain invested

    Strategic Business Planning for Commercial Producers

    Interpreting EVA
    A positive EVA means the firm generated a return to invested capital that exceeds the opportunity cost of capital
    The value of the firm should increase

    A negative EVA means the firm did not generate sufficient return to cover its cost of capital
    The value of the firm should decline

    The absolute value of EVA is less important than the trend in EVA

    Strategic Business Planning for Commercial Producers

    Diagnostics: Ways to Raise EVA


    Earn more profit without using more capital Employ less capital Invest capital in projects with greater return potential Change capital structure to reduce capital cost

    Strategic Business Planning for Commercial Producers

    Sample EVA Calculation


    Debt Earnings before Interest - Interest Net Farm Income - Labor and Managerial Charge = Net Income - Cost of Equity Capital Calculated (10%) on cost valuation basis $379,235 $98,716 $280,519 $150,000 $130,519 $128,736

    No Debt $379,235 0 $379,235 $150,000 $229,235 $353,024

    Strategic Business Planning for Commercial Producers

    Strategic Business Planning for Commercial Producers

    You might also like