Chapter 28 Financial Analysis 739
bre44380_ch28_732-758.indd 739 10/09/15 09:53 PM
Sometimes it is helpful to re-express EVA as follows:EVA =
(after-tax interest + net income_________________________
total capital− cost of capital
)× total capital= (return on capital − cost of capital) × total capitalThe return on capital (or ROC) is equal to the total profits that the company has earned
for its debt- and equityholders, divided by the amount of money that they have contributed. If
the company earns a higher return on its capital than investors require, EVA is positive.
In the case of Home Depot, the return on capital was
After-tax interest + net income_________________________
total capital=
(1 − .35) × 711 + 5,385
____________________
27,252= .2146, or 21.46%Home Depot’s cost of capital was about 9.5%. So,EVA = (return on capital − cost of capital) × total capital
= (.2146 − .095) × 27,252 = $3,258The first four columns of Table 28.4 show measures of EVA for our sample of large companies.
Apple again heads the list. It earned $30.3 billion more than was needed to satisfy investors.
By contrast, Bank of America was a laggard. Although it earned an accounting profit of $13.7
billion, this figure was calculated before deducting the cost of the capital that was employed.
After deducting the cost of the capital, Bank of America made an EVA loss of $7.5 billion.
Accounting Rates of Return
EVA measures how many dollars a business is earning after deducting the cost of capital.
Other things equal, the more assets the manager has to work with, the greater the opportunity
to generate a large EVA. The manager of a small division may be highly competent, but if that
division has few assets, she is unlikely to rank high in the EVA stakes. Therefore, when com-
paring managers, it can also be helpful to measure the firm’s return per dollar of investment.
- After - Tax Interest
+ Net Income
2. Cost of Capital
(WACC, %)
3. Total Long-Term
Capital
4. EVA =
1 − (2 × 3) - Return on Capital
(ROC, %) (1 ÷ 3)
Apple $43,337 9.1 $142,657 $30,303 30.4
Microsoft 22,738 8.7 48,992 18,495 46.4
Walmart 17,194 5.3 154,846 9,050 11.1
Exxon Mobil 39,467 6.8 301,902 19,031 13.1
Coca-Cola 8,671 5.3 59,742 5,519 14.5
Alcoa 1,340 8.4 30,463 −1,208 4.4
Delta Airlines 1,509 7.4 49,253 −2,129 3.1
Time Warner 4,313 6.8 112,137 −3,265 3.8
Sprint 1,269 6.5 122,304 −6,729 1.0
Bank of America 13,692 7.5 283,138 −7,529 4.8
❱ TABLE 28.4 Accounting measures of company performance, June 2013 (dollar values in millions). Companies
are ranked by economic value added (EVA).
Note: EVAs do not compute exactly because of rounding in column 2.
Source: We are grateful to EVA Dimensions for providing these statistics.