There’s a question in the CFAI Afternoon Mock that asks for economic profit, and it says that net income is not the correct thing to use. I thought EP = NI - equity charge where equity charge is B0 * required return on equity and EVA = EBIT (1-tax rate) * $WACC where $WACC = WACC * invested capital What gives?
I think the idea of economic profit is to show the actual profit to owners. If you are dealing with common stock holders you would use the residual income thing. If we are talking about the debt and stock holders then you need to use Eva. Don’t get caught up with the definition. Assuming clean surplus NPV will be the same for both.
RI = NI - equity charge x Bv EP = NOPAT - $WACC where NOPAT is EBIT(1-T) EVA is just sum of EP. both should end up with same value as one looks at value pre cost of debt (EBIT(1-t)) then removes the cost of debt while the other look at value created post cost of debt (NI) and then subtracts the value of non-debt capital. Hope this helps.
Eva is ep, mva is the sum of ep discounted at rate of 1 + wAcc
MVA is also equal to the NPV of economic income.
Yes exactly, with the discount rate being wacc
I thought MVA was just MV of Debt + MV of Equity?
No it’s market value added so it’s sum of ep discounted at one plus wacc
Mv of debt plus mv of equity equals mv of assets, is that when you meant by mva? I was talking about market value added not market value of assets
RI(t) = Earnings (or NI) - Equitycharge*BV(t-1)
What question number is it? We need the context.
RI= NI - (re x BV0) = (ROE -re) x BV0) --> The company value is the PV of the discounted RI at the required return on equity plus the debt investment EVA= NOPAT - $WACC = EBIT(1-T) - (WACC x Invested Capital) --> EVA is also the economic profit. You discount the economic profits at the WACC to arrive at the NPV/ MVA. You add the initial investment to the PV of the Economic Profit stream. MVA= market value - invested capital --> You are correct in thinking that the MV Debt plus MV Equity equals the MV Assets and that is the “market value” in the above equation. Then subtract the invested capital (BV Debt plus BV Equity) to arrive at MVA.
do we have a term for sum of (PV of economic income)? Thanks. piwanowi Wrote: ------------------------------------------------------- > RI = NI - equity charge x Bv > EP = NOPAT - $WACC where NOPAT is EBIT(1-T) > > EVA is just sum of EP. > > both should end up with same value as one looks at > value pre cost of debt (EBIT(1-t)) then removes > the cost of debt while the other look at value > created post cost of debt (NI) and then subtracts > the value of non-debt capital. > > Hope this helps.