Evidence on EVA

Evidence on EVA - Biddle and Gang Evidence on EVA o EVA has...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Biddle and Gang “Evidence on EVA” o EVA has attracted considerable attention as a valuation and incentive tool The theory o Residual income is based on the notion that an investment must earn more on its total invested capital than the cost of capital o Opposed to accounting measures , RI measures profits net of the full cost of debt and equity o to compute residual income, begin with NOPAT and subtract the total cost of capital measured as the WACC times invested capital o since NOPAT can be expressed as a rate of return on invested capital (ROA) times capital, RI can be restated o firms can produce positive residual income by earning a positive spread between the percent return on invested capital and the percent cost of capital o residual income can also be seen as net income minus a charge for the cost of equity capital where the cost of equity capital can be seen as the beginning-of-period book value times the cost of equity capital - 1 -
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Biddle and Gang “Evidence on EVA” EVA o EVA adjustments are supposed to produce a better measure of residual income that enhance comparability and reduces distortions of managerial incentives introduced by GAAP accounting o Reduce incentives to make operating, investing and financing choices to boost earnings and EVA in the short run, but reduce shareholder wealth (cutback in
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/16/2009 for the course F 3033 taught by Professor Hh during the Spring '09 term at Maastricht.

Page1 / 4

Evidence on EVA - Biddle and Gang Evidence on EVA o EVA has...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online