Economic value added

Subject  > Businesss Research Papers  > Accounting

EVA is a way of measuring a firm's profitability. EVA is NOPAT minus a charge for all capital invested in the business (Byrne 1). A more intuitive way to think of EVA is as the difference between a firms NOPAT and its total cost of capital (Kramer & Pushner 40). Stern Staurt's numerical definition of EVA is calculated for any year by multiplying a firm's economic book value of capital © at the beginning of the year by the spread between its return on capital ® and its cost of capital (K): EVA=(Rt-Kt)*Ct-1 (Kramer &Pushner 41). EVA is a notion of residual income (Ehrbar Xi). Investors demand a rate of return proportional to the amount of ...

... and market value over time. Far better results than NOPAT.         My results using a simple linear regression model parallels Kramer and Pushner's results. EVA in 1997 has the highest R square factor, at 33%, but is far from the results calculated by Stewart. EVA's R squared increased dramatically since 1992. This is consistent with the economic trend of the 90's, so the increase may not necessarily reflect an increase in EVA due to internal factors, but an external factor, such as the greatest economic expansion in recorded history. All four factors consistently increase from 1992 to 1997.         EVA could be a valuable

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