Weighted average cost of capital

In the field of corporate finance, Economic Value Added is a way to determine the value created, above the required return, for the shareholders of a company.

The basic formula is:


where

, called the Return on Invested Capital (ROIC).
is the firm's return on capital, NOPAT is the Net Operating Profit After Tax, c is the Weighted Average Cost of Capital (WACC) and K is capital employed. To put it simply, EVA is the profit earned by the firm less the cost of financing the firm's capital.

Shareholders of the company will receive a positive value added when the return from the capital employed in the business operations is greater than the cost of that capital; see Working capital management. Any value obtained by employees of the company or by product users is not included in the calculations.

[edit] Relationship to Market Value Added
The firm's market value added, or MVA, is the discounted sum of all future expected economic value added:


Note that MVA = NPV of company.

[edit] Other measures of shareholder value
Added Value
Market value added
Total Shareholder Return
[edit] See also
Business valuation
Free cash flow
Enterprise value
Opportunity cost
Value added
Weighted average cost of capital