This is EVA / capital , right? (EVA being NOPAT - (Capital * WACC)) Schweser video shows this measure to be EVA/ capital – WACC% which just doesn’t make sense to me. Thanks

no, the spread is EVA/capital - WACC its the spread between ROC and WACC.

Capital * Wacc = Invested Capital so EVA Spread = EVA/Invested Capital

cfaboston28 Wrote: ------------------------------------------------------- > Capital * Wacc = Invested Capital > > so EVA Spread = EVA/Invested Capital That doesn’t look right. Capital = Invested Capital = Equity+LTDebt = NWC+FixedAssets $WACC = WACC*Invested Capital EVA = NOPAT-$WACC EVA spread = EVA/InvestedCapital = (NOPAT-$WACC)/InvestedCapital = NOPAT/InvestedCapital - WACC = ROC - WACC

EVA = NOPAT - $WACC EVA spread = ROIC - WACC $WACC = WACC*invested capital ROIC = NOPAT / Invested capital

oops, meant NOPAT in the numerator earlier. Thanks to the above for clearing that up.

Awesome, thanks guys. It must be a mistake in the Schweser video. Part of the fun of the Schweser/allen resources material is spotting the deliberate mistakes, no…? So to summarise, (thanks all) EVA spread = EVA/InvestedCapital = (NOPAT-$WACC)/InvestedCapital = NOPAT/InvestedCapital - WACC = ROIC - WACC

looks good so heres a quick question to add to the topic… Using economic value added (EVA) analysis, undervalued stocks may be characterized as stocks with: A) high EVA spreads and low invested capital ratios. B) high EVA spreads and high invested capital ratios. C) low EVA spreads and low invested capital ratios. D) low EVA spreads and high invested capital ratios.

A?

A

AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA

Well, it’s def A) or B), and I guess the second part makes sense. A)

haha… yep…its A Your answer: A was correct! Using EVA analysis, undervalued stocks may be characterized as stocks with high EVA spreads and low invested capital ratios.

it’s A, I chose B last nite in a sleep deprived haze and then I noted the answer in my new “bible” (SS)

what is invested capital ratio?

maratikus Wrote: ------------------------------------------------------- > what is invested capital ratio? i think it’s mrkt value of invested capital divided by replacement cost of invested capital (basically whatever is on the x-axis of the EVA spread graph)

yeah isnt that Tobin Q ratio…or something like that

similar to tobin’s q: market value of debt & equity / replacement costs of assets

Hey this might help… Take the EVA equation: EVA = NOPAT - (IC * WACC) Divide everything by IC: EVA/IC = NOPAT/IC - WACC This is your EVA Spread: EVA Spread = ROIC - WACC