EVA and Economic profit

CFA Level II
#1

EVA and Economic proft the same?

please add comments

#2

Economic Profit = Net Operating Profit after Taxes - (Capital x WACC)

or = NOPAT - $WACC

EVA is the same concept with a differnt name. Please correct me if i’m wrong on this.

#3

Correct. Same concept, EVA is trademark.

#4

Agreed.

Also, NOPAT=EBIT(1-tax rate)

Just a side note, I always got confused by this. I always wondered why they didn’t add back the tax shield, but I think the idea is to measure how the firm would have done regardless of capital structure.

And the Total Capital would be the market values of debt and equity. Might seem obvious, but sometimes book values are used, like in MVA (market value added). And I don’t think “short term debt” is included in either…

#5

mva = pv of ep = npv of the firm.

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91312090

#6

In theory NPV, economic income, and economic profit (aka MVA) all give the same result, but sometimes the calculations can come out differently (this is in the curriculum). I forget the exactly reasons why.

#7

economic income = after tax cash flow - economic depreciation

economic profit = NI - $wacc

so i don’t see how they are equal.

#8

careful pepp, economic profit= NOPAT - $wacc

#9

righto!!! FACKKKKKKKKKKK!!!

still how and when are they equal?

#10

Economic profit = NOPAT - $ WACC. MVA is the PV of Economic Profit. They can’t be equal; EP is a figure calculated yearly, and MVA is the PV of those figures over time.

#11

Hi Pepp,

Yes you are right. Economic Income does not equal to Economic Profit.

A quick read on pg 61 - 64 of vol 3 curriculum would clear things up.

Essentially, quoting the curriculum:

  1. “Economic income is the profit realised from an investment.” Say, an equipment which you bought and used, and sell. Hence, there is going to be ATCF and economic depreciation (MarketValue_end - MarketValue_beggining).

Thus Economic Income = ATCF - economic depreciation

  1. “Economic profit is the periodic measure of profit over and beyond the dollar cost of the capital invested in the project.” Notice no selling of project. Just NOPAT - Dollar Amount to return to the sources of capital.

Thus Economic Profit = NOPAT - $WACC

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#12

I think you guys may be thinking about the theoretical homogeneity of claims approach, economic profit, and residual income. As a matter of practical appliance, pension adjustments, goodwill, and deferred taxes cause difference among them. I don’t quite understand how economic profit (NOPAT - $ WACC) and residual income (e*(r*(Bt-1))) are the same though. It looks like economic profit is money left over after satisfying the required returns of all types of financing sources thus WACC. Conversely residual income is net income (not ebit(1-t)) in excess of equity financing required return.

#13

Total invested capital = Common stock + Preferred stock + R/E + L debt

add currently liability?

please correct me. what is the definition and formular for total invested capital