So formula is WACC x invested capital.
Why is invested capital = book value of equity + book value of debt? I understand equity is money contributed in the form of common stock, but why is debt included?
It assumes debt was raised to finance a project, an aquisition etc, therefore it’s assumed it’s ‘at work’ generating NOPAT.
because debt capital is provided by lenders and subsequently invested in assets. Besides, you’re using WACC… WACC is the result of the weight and cost of debt and the weight and cost of equity, right?
Equity is also composed of many other items other than common stock, including, but not limited to retained earnings, Other Comprehensive Income, and paid in capital
invested capital = capital employed…so includes debt and equity
You sell some stock, you get some money to spend on a project.
You sell some bonds, you get some money to spend on a project.
In calculating captical in EVA/MVA formulas, do we only include long term debt in addition to equity? or long term + short term debt?
equity and long term debt. Ignore short term debt.
FYI, short term debt would generally be associated with payables/receivables/inventory, and not related to this type of analysis. It also generally should be small related to equity and long term debt totals.
in a problem to find economic profit, the company invested 100 in year 0. had dep. of 50 and EBIT of 50 in years 1 and 2.
the solution for $wacc is cost of capital * 100 in yr 1 and cost of capital * 50 in year 2.
why is it 50 instead of 100 in year 2?
Your capital has depreciated
So if EBIT is reduced by 50, equity in turn is reduced by 50, so invested capital is reduced by 50? Is that correct?