TogetthesamevaluefromdiscountedcashflowandEVA
valuations,wehaveto ensurethatthefollowingconditions
hold.
- Theafter-taxoperatingincomeusedtoestimatefree
cashflowstothefirmshouldbeequaltotheafter-tax
operating income usedto compute economic value
added. Thus, if we decide to adjust the operating
income for operating leases and research and
developmentexpenses when doing discountedcash
flowvaluation,we haveto adjustitforcomputing
EVA as well. - Thegrowthrateusedtoestimateafter-taxoperating
income in futureperiodsshould be estimatedfrom
fundamentals when doing discounted cash flow
valuation. In other words, it should be set to:
Ifgrowthisanexogenous inputintoaDCF model
and the relationship between growth rates,
reinvestments,andreturnoncapitaloutlinedearlier
doesnothold,youwillgetdifferentvaluesfromDCF
and EVA valuations.- Thecapitalinvested,whichisusedtocomputeEVA
infutureperiods,shouldbeestimatedbyaddingthe
reinvestmentineachperiodtothecapitalinvestedat
thebeginningoftheperiod.TheEVAineachperiod
should be computed as follows: