ROE formula?
np/sales x sales/assets x assets/equity
ROI formula?
EBIAT / net investment
RI formula?
EBIAT - (WACC)(net investment)
(ROI - WACC)(net investment)
EVA formula?
ROI +- accounting adjustments
net investment formula?
TA - CLs (operating, not s/t finance)
what is EBIAT?
operating profit
disadvantages of accounting-based evaluation?
- manipulation
- focus on cost control, loss of beneficial discretionary expenditure
- do not represent actual cash
disadvantages of net profit to evaluate?
- focus only on covering costs, no excess returns
- accepts investments that are profitable rather than that return > WACC
- S/T focused
adv & disadv of ROI to evaluate?
- is a %, easy to compare
- encourages inappropriate asset disposal
- can destroy value/not be goal congruence (evaluate projects using WACC not only ROI)
adv & disadv of RI to evaluate?
- incorporates WACC as a consideration = goal congruence
- better indicates value creation
- cannot compare
- encourages cutting discretionary exp
- manipulation
what does EVA measure?
the value added to shareholders
what is the purpose of acc-adj in EVA?
take acc profit back to FCF (be consistent with DCF)
what kinds of adjustments can be made in EVA?
- cap and amort any discretionary exp
- inventory = LIFO
- FMOH = period cost
- annuity, not str-line depreciation
what is delta EVA?
the increase in current year EVA over prior
what causes movements in EVA?
- higher return on assets
- earning returns > cost of capital for new assets
what is MVA?
market-value added
the PV of the future EVA
