Questions and Answers
What variables are needed for valuation using EVA methodology?
CAPEX, Invested capital, and Unlevered FCF
Why is DCF preferred to EVA in terms of sensitivity analysis?
DCF is a more precise methodology than EVA
What is the impact of growth rate and WACC on EVA valuation?
They significantly influence EVA valuation outcomes
In the context of constant perpetual NOPAT and cost of capital, what is the significance of end-year capital being $300m?
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What is the correct formula to calculate economic value added?
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Which of the following variables are NOT needed for valuation using EVA methodology?
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Why is DCF preferred to EVA in terms of sensitivity analysis?
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If a firm has a constant perpetual NOPAT of $100m and a cost of capital of 10%, what would be the total value destroyed if the firm's end-year capital was $400m instead of $300m?
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What is the significant impact of the growth rate and WACC on EVA valuation?
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In economic value added (EVA) methodology, what happens to the total value created if the invested capital increases significantly?
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Study Notes
EVA Methodology
- For valuation using EVA methodology, the following variables are needed: Invested capital, Historical growth rates, and Unlevered FCF.
- EVA is not a more precise methodology than DCF, and DCF is not preferred to EVA because EVA does not require sensitivity analysis.
- The growth rate and WACC have a significant impact on EVA valuation.
EVA Calculation
- To calculate the total value created by a firm, the formula is: NOPAT / (Cost of capital)
- For example, if a firm has a constant perpetual NOPAT of $100m and a cost of capital of 10%, the total value created is $100m / 0.10 = $1,000m, and the present value of the firm's capital is $1,000m - $300m = $700m.
Economic Value Added (EVA)
- The formula to calculate EVA is: Net profit, after tax - (capital invested * WACC)
- EVA measures the value created by a firm above its cost of capital.
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