Some Explanations to What's Wrong with the Economic Value Added?
7 Pages Posted: 15 Sep 2008
Date Written: September 1, 2008
The paper supplies additional explanations to my earlier published article What's Wrong with the Economic Value Added. It stresses that the construction of Accounting based Capital Charge doesn't mean the departure from market values of cost of equity and cost of debt. On the contrary Accounting based Capital Charge restores the truth and adds the amounts of opportunity costs on equity invested and debt invested according to the weights of equity and debt in the total amount of Invested Capital. Accounting based EVA still maintains the linkage with the market capital structure by means of Cost of Levered Equity, which should be used to calculate Accounting based Capital Charge. The Cost of Levered Equity embraces the effects of capital structure, as well as Cost of Debt does, which is also reacts to the changes in financial leverage.
Keywords: Economic Value Added (EVA), Residual Income (RI), Performance Measurement, Capital Charge, Weighted Average Cost of Capital (WACC), Accounting WACC, Market WACC, Accounting EVA, Market-based EVA, Cross-Bred EVA, Residual Market Profit, Firm Evaluation, Project Evaluation, Corporate Finance
JEL Classification: G30, G31, G32, H43, M41, M46
Suggested Citation: Suggested Citation