WACC Continue Common Equity Cost 14.1% Cost for Common Equity (12/85 x 100) Rs. 12/- EPS (Estimated by investors & reliable analyst) Rs. 85/- Net Return (Less issuing cost) Rs. 100/- Share Price (Per Share)
WACC Continue Summarizing 14.1% Common Equity Cost 11.2% Preferred Stock Cost 9.47% Bond Cost
Calculation of WACC for XYZ Company The total Weighted Average Cost of Capital (WACC) = 1,68,478 / 14,00,000 = 12.03% 1,68,475/- - 14,00,000/- Total Capital 98,700/- 14.1 7,00,000/- Common Equity Cost 22,400/- 11.2 2,00,000/- Preferred Stock Cost 47,375/- 9.47 5,00,000/- Long Term Debt Total (Rs.) Cost (%) Amount (Rs.) Particulars
Calculation of EVA for XYZ Company Rs. 21,550/- Economic Value Added (EVA) (Rs. 2,02,000 – Rs. 1,80,450) Rs. 1,80,450/- Capital Charge (12.03/100 x Rs. 15,00,000/-) 12.03% Cost of Capital Rs. 15,00,000/- Capital Employed (Including Rs.1,00,000/- Reserve & Surplus) Rs. 2,02,000/- NOPAT
EVA does not control for size differences across plants or divisions.
EVA is based on financial accounting methods that can be manipulated by managers .
EVA may focus on immediate results which diminishes innovation.
EVA provides information that is obvious but offers no solutions in much the same way as historical financial statement do.
Conclusion As a performance measure, Economic Value Added forces the organization to make the creation of shareholder value the number one priority. EVA is changing the way managers run their businesses. When business decisions are aligned with the interest of the shareholders, it is only a matter of time before these efforts are reflected in a higher stock price.