You are on page 1of 4

Measuring Economic Value Added (EVA

)

Economic Value Added measures performance by comparing an institution's net o
after taxes (NOPAT) with a capital charge, or opportunity cost. The capital charge is
return to stockholders based on a specific allocated risk capital amount.
Market Value Added (MVA) represents the increase in market value over the histo
of capital invested. It is equivalent to the gross profit level of the firm. To measure th
one needs an accurate measure of the cost of capital.
Capital derives from several sources. It includes funds derived from new stockho
issued, deferred (net) tax credits, non-recurring items such as restructuring charges,
unamortizede securities gains. The corresponding NOPAT thus differs from standard
measures of the cost of capital in that it reflects the weighted average cost of capita
EVA Example
A. Balance Sheet
Assets
Cash
Securities
Commercial Loans
Credit Card Loans
-Loss Reserve
Other Assets
Total Assets

$Millions
$150.00
$800.00
$2,000.00
$1,900.00
-$100.00
$250.00
$5,000.00

Risk-weighted Assets:
Weight
Asset
Value
0.50
$800.00
$400.00
1.00 $2,000.00
$2,000.00
1.00 $1,900.00
$1,900.00
1.00
$250.00
$250.00
Total $4,550.00

Rate

Liabilities and Equity
Demand Deposits
6.50% MMDAs
9.00% CDs
10.00% Small Time Deposits
Deferred Tax Credits
Equity
Total Liability & Equity
Tier 1 Equity Capital
Total Capital
Tier 1 Ratio
Total Reserve Ratio

B. Income Statement
Interest Income
Interest Expense
Rate
Asset
Amount
Rate
Asset
6.50%
$800.00
$52.00
3.00% $1,800.00
9.00% $2,000.00
$180.00
5.50% $1,300.00
10.00% $1,900.00
$190.00
4.50%
$680.00
Total
$422.00
Total
Provision for Loan Losses
Noninterest Income
Noninterest Expense
Pre-Tax Income

00% Net Income Rate C.33% =($66. Return on Assets (ROA) Net Income $66.54)÷ $5.90 Opportunity Cost of Capital (OCC) 12.00 2. Profitability Measures 1. Return on Equity (ROE) Net Income $66.00 ROE: 20.00 EVA: $8.79% =($66.00 4.Taxes at 40.000.000.00% Allocated Risk Capital (ARC) $550. Economic Value Added (EVA) NOPAT $74. 3.90 =($74.54)÷ $320.54 Assets $5.00 ROA 1.90) - .54 Equity Capital $320.

550. Example abilities and Equity mand Deposits $Millions $800.50 $30.00 $1.00 9.000.550.90 .00 $420.00 al Reserve Ratio 7.00 mall Time Deposits ferred Tax Credits tal Liability & Equity Rate 3.300.00 $100.00 $156.00 -$190.00 $1.23% =($420.50% r 1 Equity Capital al Capital $320.10 $265.00 $71. To measure these variables s funds derived from new stockholder equity ms such as restructuring charges. se in market value over the historical amount fit level of the firm.00 $60.800.00 $5. The capital charge is the required d risk capital amount.00 $320. and NOPAT thus differs from standard GAAP e weighted average cost of capital from all sources.90 -$25.00 $680.00 Net Interest Income Amount $54.03% =($320.00)÷ $4.00 $110.10 Income Expense Net Income $422.00% 5.60 $156.00)÷ $4.50% 4.mic Value Added (EVA) y comparing an institution's net operating profit unity cost.

00 Capital charge (OCC) 12.00 Cash taxes paid $39.00 .00 Cash taxes paid -$39.00 (by assumption) Net Operating Profit After Taxes (NOPAT) Pre-Tax Income $110.00%)X $550.36 $66.00 Net charge write-offs -$22.54 Net charge write-offs $22.$44.00 NOPAT: $74.00% Allocated Risk Capital (ARC) $550.90 Provision for Loan Losses $25.90 (12.