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EVA

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA APM Exams › EVA

Viewing 4 posts - 1 through 4 (of 4 total)
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  • August 24, 2020 at 7:25 am #581698
    akka17bakka
    Participant
    • Topics: 104
    • Replies: 99
    • ☆☆☆

    Hi Turor,

    Could you kindly explain why do we add back interest net of tax in EVA calculation?

    Thanks.

    August 24, 2020 at 7:56 am #581709
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10544
    • ☆☆☆☆☆

    NOPAT is before interest and after tax.

    Ordinary profit after tax as shown in the financial statements is after interest and tax. However, interest hets tax relief.

    So, if interest is 100 and tax is 25%, the tax relief in the interest means that the net interest cost in profit after tax is only 75. To convert PAT to NOPAT by adding back interest means that an adjustment of only 75 is needed.

    August 25, 2020 at 5:56 pm #581980
    akka17bakka
    Participant
    • Topics: 104
    • Replies: 99
    • ☆☆☆

    Hi Tutor,

    Does it have to do anything with WACC, like post tax cost of debt, so thats why we take interest net of tax?

    Thanks.

    August 25, 2020 at 8:46 pm #581998
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10544
    • ☆☆☆☆☆

    No. It is purely to do with the definition of NOPAT. To fo from PAT to NOPAT you jave to remove all interest effects, both the amount paid and the tax saving on the interest.

    See our notes and lectures P87 onwards.

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