Investments, tenth edition

 Example  19.2 

Economic Value Added 

bod61671_ch19_635-677.indd   644

bod61671_ch19_635-677.indd   644

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7/17/13   4:13 PM

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  C H A P T E R  

1 9

 Financial 

Statement 

Analysis 

645

  Table  19.6  shows EVA for a small sample of firms. The EVA leader in this sample 

was Microsoft. Notice that ExxonMobil’s EVA was greater than Intel’s, despite a smaller 

margin between its ROC and the cost of capital. This is because ExxonMobil applied its 

margin to a much larger capital base. At the other extreme, AT&T earned less than its 

opportunity cost of capital, which resulted in a negative EVA.  

 Notice that even the EVA “losers” in  Table 19.6  reported positive accounting profits. 

For example, by conventional standards, AT&T was solidly profitable in 2012, with an 

ROC of 3.9%. But its cost of capital was higher, at 4.9%. By this standard, it did not 

cover its opportunity cost of capital, and returned a negative EVA in 2012. EVA treats 

the opportunity cost of capital as a real cost that, like other costs, should be deducted 

from revenues to arrive at a more meaningful “bottom line.” A firm that is earning prof-

its but is not covering its opportunity cost might be able to redeploy its capital to bet-

ter uses. Therefore, a growing number of firms now calculate EVA and tie managers’ 

compensation to it.    

 Source: Authors’ calculations using data from   finance.yahoo.com.     Actual EVA estimates reported by Stern 

Stewart differ from the values in  Table 19.6  because of adjustments to the accounting data involving issues 

such as treatment of research and development expenses, taxes, advertising expenses, and depreciation. 

The estimates in  Table 19.6  are designed to show the logic behind EVA but must be taken as imprecise.