Int. Acc. MA LECT 7: CH 19 Control systems and performance measurement…
Int. Acc. MA LECT 7: CH 19 Control systems and performance measurement part 3:
Describe the economic value added (EVA) method and return on sales measure (ROS)
see branches below
A measure of
created on an investment
It is the value generated from funds invested in a
Economic value added (EVA®) = After-tax operating profit – [Weighted-average cost of capital × (Total assets – Current liabilities)]
EVA < 0: A business is destroying value on the funds invested in it
EVA(II): Weighted Average Cost of capital
How much interest has the company to pay for every dollar it finances.
The overall required return on the firm as a whole
The average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation
A company's assets are financed by either debt or equity.
EVA® substitutes the following specific numbers in the RI calculations:
2 A required rate of return equals to the weighted-average cost of capital
3 Investment = total assets - current liabilities.
1 Income equal to after-tax operating profit
EXAMPLE slide 56-61
Book value of equity = Total assets - total liabilities
The cost of equity capital is the opportunity cost to investors for not investing their capital in another investment that is similar in risk to Ye Olde Brewery.
WACC = [(7% × Market value of debt)
(14% × Market value of equity)]
÷ (Market value of debt + Market value of equity)
Return on sales (ROS)
The income-to-revenue (sales) ratio, or return on sales (ROS) ratio, is a frequently-used financial performance measure.