1. EVA= NOPAT- $WACC, where NOPAT= EBIT(1-t) and $WACC=WACC*Invested Capital
2. EVA Spread=EVA/Invested Capital= Return on Capital (ROC)+ WACC % rate, where ROC= NOPAT/Invested Capital
3. Firm’s enterprise Value (EV)= Invested Capital +MVA, where MVA= PV of future EVA. If we assume EVA to be a perpetuity (for simplicity), then EV= IC+ (EVA/WACC) . Here, MVA is also referred to as Net Present Value (NPV).
Note: EV also equals= Equity+ Debt- Cash and investments (as learned previously) and MVA= MV of long term debt and equity- BV of long term debt and equity
3a. Five ways to increase EVA- Increase revenue, decrease operating expenses, Decr. WACC, decrease invested Capital, and take advantage of positive NPV projects (in which case, the positive cash inflow will be more than the investment in capital).
4. CFROI (Cash Flow Return on Investment) Ratio can b calculated using the following steps-
a. computer life of the assets (N)
b. Compute gross CF (PMT)
c. compute gross cash investment (PV)
d. compute non-depreciable assets (FV)
e. solve for CFROI (I/Y)
5. We can use EVA for stock selection using a graph where the Y-axis= EVA spread (ROC-WACC) and the X-axis= Ratio of MV of invested capital (enterprise value)/replacement cost of invested capital. This ratio is crudely equal to P/B. Stocks lying above the curve are underpriced and stocks lying below the curve are overpriced.
