This might be stupid, but sometimes when calculating $WACC, I use total assets. However, in some problems I’ve seen them use Invested capital or Long term debt + equity (this isn’t the same as total assets, it leaves out accounts payable). Which method is right?

While I’m at it, can someone explain this? I don’t understand the low invested capital ratios part. Using EVA analysis, undervalued stocks may be characterized as stocks with high EVA spreads and low invested capital ratios.

if you’re talking about the calculation of invested capital, use either: CA-CL + net F/A or equity + long-term debt in other words, use the latter. but it leave out all CL

EVA Spread = EVA/Invested Capital = Return on Capital – WACC Invested capital ratios hmm, maybe they mean Invested Capital / Total Capital?

EVA spread is defined as [nopat-$wacc]/invested cap = ROIC-WACC. you want your return on invested capital to be larger than your cost of capital, otherwise you would be losing value. you also want to invest as little capital as possible for a unit of return.

Mkt value / replacement cost of capital This is a measure proxy for Price to Book value. The lower the better

phBOOM Wrote: ------------------------------------------------------- > Mkt value / replacement cost of capital > > This is a measure proxy for Price to Book value. > The lower the better This is also known as the Tobin Ratio.