Scheweser notes say (book 3 page 233) “EVA measures the value added for shareholders by management during a given year.”.
Should it not be Shareholders plus debtholders ??
wiki seems to agree with me.
EVA = Nopat-$Wacc
Amount earned by the shareholders.As for the Debt holders they do not share profits.All they get is the fixed return on their investment.
aah!! Yes. WACC is gonna make due changes for the interest payments that have to be made to debtholders. Got it. thanx dude.
Just remember that NOPAT is an unlevered figured (like FCFF) and $WACC is the charge to both debt and equity holders. Anything left after paying both debt and equity holders their required returns is residual and therefore goes to equity holders. Over the long-term just like in residual income models NOPAT should equal $WACC as more competition enter the industry.
Does that make sense?
Perfectly. Thank you.
why is NOPAT unlevered?
Because you’re not subtracting interest expense, there is no financial leverage (i.e., DFL = 1.0). Recall DOL, DFL, and DTL from Level I. Here’s an article to refresh your memory: http://financialexamhelp123.com/degree-of-financial-leverage-dfl/.