Economic value added

Net operating profit after tax minus a charge for all the capital used, at the weighted average cost of capital. A form of residual income used in pay schemes and to judge divisions.

Where you will meet it

Economic value added appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Work out economic value added, market value added and residual income and explain what they mean
  CFA Level II · Equities

  “Economic value added applies the same idea to the whole firm: EVA = NOPAT − WACC × invested capital, where NOPAT is EBIT × (1 − t).”

• Explain what residual income models are used for
  CFA Level II · Equities

  “Economic value added, a form of residual income, is used in executive pay schemes and to assess divisions.”

See also

Operating profit · Residual income · Weighted average cost · Weighted average cost of capital

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with E · Glossary