VAIC: New Financial Performance Metric and Valuation Tool

Cuadernos Latinoamericanos de Administración. Volumen IX Número 16. Enero - Junio de 2013. pp 9-20

12 Pages Posted: 13 May 2012 Last revised: 6 Sep 2013

See all articles by Rauf Ibragimov

Rauf Ibragimov

Russian Presidential Academy of National Economy and Public Administration

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy

Date Written: May 12, 2012

Abstract

This article introduces a new financial metric for managerial performance evaluation, Value Added to Invested Capital (VAIC), with the cost of unlevered equity as a hurdle rate to calculate the capital charge rather than the widely accepted WACC. VAIC preserves all positive features of the conventional residual operating income and EVA® and has the distinct advantage of computational simplicity and straightforward interpretation. Associated valuation model is equivalent to the standard discounted cash flow approach; this equivalence is formally proved under certain assumptions regarding the risk of tax shields and confirms consistency of the new metric proposed. VAIC can serve as an aggregate financial indicator on the business performance dashboards, and might as well be considered a valid substitute for the established EVA© and ReOI metrics in evaluating managerial performance. Equivalence of the VAIC valuation model to the fundamental approach of valuing a business by cash flow discounting makes this metric not only a robust measure of financial performance but also a full-fledged investment valuation tool.

Keywords: Performance measurement, Economic Value Added, EVA, Residual income, Residual operating income, Valuation

JEL Classification: G32, G39, M21, M41

Suggested Citation

Ibragimov, Rauf and Velez-Pareja, Ignacio and Tham, Joseph, VAIC: New Financial Performance Metric and Valuation Tool (May 12, 2012). Cuadernos Latinoamericanos de Administración. Volumen IX Número 16. Enero - Junio de 2013. pp 9-20 . Available at SSRN: https://ssrn.com/abstract=2056823 or http://dx.doi.org/10.2139/ssrn.2056823

Rauf Ibragimov (Contact Author)

Russian Presidential Academy of National Economy and Public Administration ( email )

Vernadskogo Avenue,82
Moscow, Moscow region 119571
Russia
007 495 4347103 (Phone)
007 495 4349027 (Fax)

HOME PAGE: http://www.ranepa.ru/eng/

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy ( email )

Box 90312
302, Towerview Dr, Rubenstein Hall, Room 272
Durham, NC 27708
United States
919-613-9234 (Phone)
919-681-0831 (Fax)

HOME PAGE: http://fds.duke.edu/db/Sanford/faculty/thamjx

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