EVA(c) Made Simple: Is it Possible?

Abstract:     
Velez-Pareja and Tham, 2003a, Velez-Pareja and Tham, 2003b and Tham and Velez-Pareja, 2004 showed the matching between discounted cash flow (DCF) methods and value added methods. They departed from the net operating profit less adjusted taxes NOPLAT and net income when using market values to calculate the weighted average cost of capital (WACC) and the cost of levered equity, Ke. In those previous works they assumed that the proper discount rate for the tax savings is the unlevered cost of equity, Ku. We assume the same discount rate in this paper. The previous procedures implied circularity between the cost of capital and the levered values. In this paper we show that the same firm values can be obtained using the cost of unlevered equity, Ku and the net income and the interest charges. No circularity is found using this procedure.

Number of Pages in PDF File: 12

Keywords: EVA, economic value added, cash flows, free cash flow, cash flow to equity, valuation, levered value, levered equity value, cost of levered equity, cost of unlevered equity, tax savings

JEL Classification: M21, M40, M46, M41, G12, G31, J33

working papers series