Economic Value Added Model
NÁRODNÁ BANKA SLOVENSKA
USING OF THE ECONOMIC VALUE ADDED MODEL FOR VALUATION OF A COMPANY
Doc. Ing. Eva Kislingerová, CSc. Prague University of Economics
Introduction
There is possibility to use, with respect to the object of valuation, several methods for valuation of a company in practice. One of the most important and highly used group of methods are yield methods. They are usually called Discounted Cash Flows (DCF) methods. Value of a company is derived from present value of future incomes connected with the ownership of a company. The core of these models is working with time value of future incomes investor gets in case of realization of an investment. There are several possibilities to work with future incomes in DCF models, like using cash flow, free cash flow or in some cases dividends. These are models with construction and way of using well known to professional public, therefore the aim of this article is to focus on model called EVA – Economic Value Added, which is recently highly used by investors coming from developed market economies.
A basic construction of EVA measure is clear from the following formula: EVAt = NOPATt – Ct x WACCt where NOPATt is Net Operating Profit After Tax, Ct is long term capital, WACC is Weighted Average Cost of Capital. If EVA > 0 than we can say a company is successful. This is the only case wealth of shareholders increases because they gain more than what their original investment was. The service to creditors is included there, too. In case EVA = 0 a company produced just as much as it was invested and EVA < 0 leads to destroying of whealth of shareholders. From above mentioned construction it is clear that EVA concentrates all important aspects of business, like: – the amount of capital involved to business and its internal structure (talking about proportion od D/C and E/C), – cost of capital (shareholders’ and creditors’capital), which is price a company must pay for using resources (WACC), – effective
USING OF THE ECONOMIC VALUE ADDED MODEL FOR VALUATION OF A COMPANY
Doc. Ing. Eva Kislingerová, CSc. Prague University of Economics
Introduction
There is possibility to use, with respect to the object of valuation, several methods for valuation of a company in practice. One of the most important and highly used group of methods are yield methods. They are usually called Discounted Cash Flows (DCF) methods. Value of a company is derived from present value of future incomes connected with the ownership of a company. The core of these models is working with time value of future incomes investor gets in case of realization of an investment. There are several possibilities to work with future incomes in DCF models, like using cash flow, free cash flow or in some cases dividends. These are models with construction and way of using well known to professional public, therefore the aim of this article is to focus on model called EVA – Economic Value Added, which is recently highly used by investors coming from developed market economies.
A basic construction of EVA measure is clear from the following formula: EVAt = NOPATt – Ct x WACCt where NOPATt is Net Operating Profit After Tax, Ct is long term capital, WACC is Weighted Average Cost of Capital. If EVA > 0 than we can say a company is successful. This is the only case wealth of shareholders increases because they gain more than what their original investment was. The service to creditors is included there, too. In case EVA = 0 a company produced just as much as it was invested and EVA < 0 leads to destroying of whealth of shareholders. From above mentioned construction it is clear that EVA concentrates all important aspects of business, like: – the amount of capital involved to business and its internal structure (talking about proportion od D/C and E/C), – cost of capital (shareholders’ and creditors’capital), which is price a company must pay for using resources (WACC), – effective