For working out EVA, the cost of capital is calculated as:
A)Capital Employed multiplied by weighted average cost of capital (WACC)
B)Capital borrowed multiplied by the rate of interest
C)Capital provided by the firm's owners multiplied by the long term rate of dividends
D)The cost of a issuing new shares

Question

Quizplus · Accepted Answer

EVA (Economic Value Added) is calculated by subtracting the cost of capital from the net operating profit after tax (NOPAT). The cost of capital is the weighted average cost of capital (WACC) which reflects the cost of debt and equity financing. It is calculated as the proportion of debt and equity in the capital structure multiplied by the respective cost of capital (interest rate for debt and cost of equity for equity). Therefore, choice A is the correct option as it multiplies the capital employed (sum of debt and equity) with the WACC.

For Working Out EVA, the Cost of Capital Is Calculated