EVA

This topic has 3 replies, 2 voices, and was last updated 5 years ago by Ken Garrett.

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August 24, 2020 at 7:25 am #581698
akka17bakka
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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
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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
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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
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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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