What's the investment capital ratio

In reference to this question what is the actual ratio? Using economic value added (EVA) analysis, overvalued stocks may be characterized as stocks with: A) low EVA spreads and low invested capital ratios. B) high EVA spreads and high invested capital ratios. C) high EVA spreads and low invested capital ratios. D) low EVA spreads and high invested capital ratios.

C would be the answer Invested capital ratio= MV of invested capital/replacement value of invested capital= EV/replcatement cost of investment capital Where invested capital = NWC + PPE = long term debt + Equity.




D. It is like P/B ratio. high = overvalue.

D for sure. Look at the graph in the books.

Oh it is definitely D. I didnt see in the question that it was asking for overvalued stocks. Answer C would be for undervalued stocks.

D as well…the graph in the book is great here to remember

joker Wrote: ------------------------------------------------------- Look at the graph in the books. joker - Which graph are you talking of, is it in CFAI-Books? Can you drop in the page number ?? :frowning:


I think the answer for the question of cofusing. I couldn’t find any offical defination of “invested capital ratios” anywhere. answer should be A or D.

answer is D invested capital ratios is MV of Capital / Replacement Cost of Capital. It’s in the schweser text…it’s basically a crude estimate of P/B. so if the capital is high, chances are your stock is overvalued…and vice versa…

D - just feels right.

D . See graph on page 558 in CFAI text- Vol IV EVA spread is EVA/Invested Capital ( also known as excess return on invested capital) EVA = NOPAT - WACC* Invested capital rearranging we get EVA/Invested Capital = (NOPAT/Invested capital) - WACC Hence , EVA Spread is also = ROIC - WACC Market value of invested capital / replacement cost of invested capital i.e. Invested Capital ratio… So a company is fundamentally overvalued, if the EVA spread is relatively low ( i.e. the company is not earning enough over required return ), and Market Value of invested capital ( mainly MV of equity + Debt value) is relatively high. (i.e. Market is giving a higher price recognition to a company which does not earn much excess return Long post… partially for myself… so that I can remember this concept too till exam day :slight_smile: (any body else getting the feeling that what ever you had read earlier , you can’t remember much??)