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EVA is a way of measuring a firms profitability EVA is NOPAT minus a charge for all capital invested in the business Byrne 1 A more intuitive way to think of EVA is as the difference between a firms NOPAT and its total cost of capital Kramer Pushner 40 Stern Staurts numerical definition of EVA is calculated for any year by multiplying a firms economic book value of capital at the beginning of the year by the spread between its return on capital and its cost of capital K EVARt-KtCt-1 Kramer Pushner 41 EVA is a notion of residual income Ehrbar Xi Investors demand a rate of return proportional to the amount of risk incurred Operating profits determine residual income by plotting them against the required rate of return a product of both debt and equity EVA takes into account all capital invested Peter Druker says in his Harvard Business Review article EVA is based on something we have known for a long time What we call profits the money left to service equity is not profit at all Until a business returns a profit that is greater than its cost of capital it operates at a loss Never mind that it pays taxes if it had a genuine profit The enterprise still returns less to the economy than it devours in resourcesUntil then it does not create wealth but destroys it Ehrbar 2 EVA is a measure of wealth creation or destruction after all costs are capitalized Companies use EVA as a measure of corporate performance as an incentive system and as a link between shareholder and managementemployee goals Stock price indicates investors certainty concerning current and future earnings potential EVA is a static measure of corporate performance MVA is a dynamic forward looking market performance measure MVA is a market generated number calculated by subtracting the Capital invested in a firm from the sum V of the total market value of
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