In Practice Economic Value Added EVA

Economic value added is a value enhancement concept that has caught the attention of both firms interested in increasing their value and portfolio managers, looking for good investments. EVA is a measure of dollar surplus value created by a firm or project and is measured by doing the following:

Economic Value Added (EVA) = (Return on Capital - Cost of Capital) (Capital Invested) The return on capital is measured using "adjusted" operating income, where the adjustments9 eliminate items that are unrelated to existing investments, and the capital investment is based upon the book value of capital, but is designed to measure the capital invested in existing assets. Firms that have positive EVA are firms that are creating surplus value, and firms with negative EVA are destroying value.

9 Stern Stewart, which is the primary proponent of the EVA approach, claims to make as many as 168 adjustments to operating income to arrive at the true return on capital.

While EVA is usually calculated using total capital, it can be easily modified to be an equity measure:

Equity EVA = (Return on Equity - Cost of Equity) (Equity Invested in Project or Firm) Again, a firm that earns a positive equity EVA is creating value for its stockholders while a firm with a negative equity EVA is destroying value for its stockholders.

The measures of excess returns that we computed in the tables in the last illustration can be easily modified to become measures of EVA:

Retirement Planning For The Golden Years

Retirement Planning For The Golden Years

If mutual funds seem boring to you, there are other higher risk investment opportunities in the form of stocks. I seriously recommend studying the market carefully and completely before making the leap into stock trading but this can be quite the short-term quick profit rush that you are looking for if you am willing to risk your retirement investment for the sake of increasing your net worth. If you do choose to invest in the stock market please take the time to learn the proper procedures, the risks, and the process before diving in. If you have a financial planner and you definitely should then he or she may prove to be an exceptional resource when it comes to the practice of 'playing' the stock market.

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