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EVA

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  • This topic has 3 replies, 2 voices, and was last updated 2 months ago by Ken Garrett.
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  • August 24, 2020 at 7:25 am #581698
    akka17bakka

    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

    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

    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

    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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