Calculation of EVA

This topic has 3 replies, 2 voices, and was last updated 12 years ago by Ken Garrett.

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May 17, 2014 at 6:31 pm #169218
ssergey
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EVA is calculated as NOPAT less capital employed*WACC

Capital employed is equity plus debt at the start of the year

The question is by saying equity we mean shareholder funds only/ or shareholder funds plus retained earnings?
May 18, 2014 at 3:37 pm #169327
Ken Garrett
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Shareholders’ funds includes retained earnings. So capital employed=

Share capital + reserves (retained earnings) + long term debt.
May 18, 2014 at 9:07 pm #169391
ssergey
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Thank you for your answer,

In chapter 10, page 63, example 5 of your course notes, you calculate EVA for two years 2006 and 2007. As per question capital employed at the end of 2005 i.e. start of 2006 is 400k so we consider it as capital employed in 2006. For capital employed in 2007, we go to SFP 2006. Answer says 312 (shareholder funds) + 88 (long-term debt) = 400 . Does 312 ( shareholder funds) already include Retained earnings of 47 for 2006?
May 19, 2014 at 5:55 am #169432
Ken Garrett
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Yes it will, otherwise the SOFP would not balance as at the end of 2007. The SOFP is a snapshot at a date. The retained earnings of 47 in 2006 effectively causes a journal of:

Dr Assorted assets
Cr Retained earnings

and this will already be in the 2007 SOFP.
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