Definition of EVA (Economic Value Added)

Definisi EVA (Economic Value Added)
Definition of EVA (Economic Value Added)

Only the company's goal to generate maximum profits has been less relevant again in the present because of corporate responsibility not only to the owner only. Responsibility to all stakeholders is very important that this requires companies to weigh all the strategies adopted and the impact to stakeholders. Based on this, the appropriate goal is to maximize the value of a company. In the case of public companies corporate value associated with the value of outstanding shares in the market. Determination of the correct destination will be very influential in the process of achieving goals and performance measurement later. Because the purpose of determining the error will result in errors strategies adopted. Performance measurement errors will result in errors in reward for his accomplishments there. Performance management and achievement as measured by financial ratios can not be accounted for because of the resulting financial ratios depend on the accounting methods used. With the accounting distortion is then measuring performance based on earnings per share (earnings per share), earnings growth rate (earnings growth) and the rate of return (rate of return) is not effective anymore. Because measurement is based on this ratio is not reliable in measuring the value added created during the period, the criticism raised about how valid measurement of performance based on financial ratios can indicate the actual performance of the management company. Their Economic Value Added (EVA) to be relevant for measuring performance based on the value (value) because EVA is a measure of economic value added generated by the company as a result of activity or management strategy.

The performance of a company is measured by financial ratios for a specific period. Measurement is based on financial ratios is highly dependent on the accounting methods used in preparing the financial statements of the company. So often the company's performance look good and increase, which is actually the company's performance is not increasing and even decrease. Performance management and achievement as measured by financial ratios largely depend on the accounting methods used, because the measurement is based on the ratio that is created within a particular period has not been able to show actual enterprise performance management.

If the company's financial performance showed a good prospect, then the shares will be attractive to investors and the price will rise. In the concept of investment there is a theory that states have a high return high risk as well, so the company whose performance is very good, then very likely risk of falling is higher when compared with the company's performance was mediocre. At the time of fierce competition in the global market today, the company's goal to maximize profit becomes difficult to be realized. Instead the company's goal to increase the Economic Value Added (EVA). EVA is a measure of economic value added produced by the company as a result of the activities or management strategies. Positive EVA indicates the company managed to create value for the owners of capital because the company is able to earn a rate exceeding the rate of capital costs. This is in line with the objective of maximizing the value of the company. Instead negative EVA indicates that the value of the company decreased due to a lower rate of return than the cost of capital.

Role of EVA (Economic Value Added)

With the EVA, the owner of the company would only reward (reward) activities that add value and discard activities that undermine or diminish the overall value of a company. Value added activities that can be separated from the activities nonvalue added by value added assessment process. The owner of the company is expected to encourage management to take actions or strategies that value added because it allows the company to operate properly. Management will be paid in large quantities, if they create greater added value. Many other things in the company where EVA also play a role. Economic Value Added assist management in terms of establishing internal purposes (internal goalsetting) companies that purpose based on the long-term implications and not short-term. In terms of investment EVA provides guidance for decision acceptance of a project (capital budgeting decision), and in terms of evaluating the performance of routine (performance assessment) management, EVA help achieve value added activities. EVA also helps their payroll or incentive system (incentive compensation) right where management encouraged to act as owner. The existence of EVA becomes relevant to measure performance based on the economic value generated by a company. With the EVA, the owner of the company will reward activities that add value and dispose of facilities that destroy or reduce the overall value of a company and assist management in determining the company's internal goal for the long-term implications and not short-term. A performance measurement system within the company should be able to distinguish between activities that value added by non-value added activities. This division is necessary so that the management of the organization can focus to reduce costs arising from non-value added activities. With initial communicate that the company's goal is to maximize value instead of profits, so that managers become more focused on value creation and not the pursuit of big profits.

Excellence EVA (Economic Value Added)

EVA is economic added value created by the company from the activity or management activities for a certain period. EVA principles provide a good measurement system to assess the company because EVA is directly related to the market value of a company. The management company can do a lot to create added value, but principally EVA will increase if the management do one of the following three things (Steward, the Lisa, 1999):

1) Increase the operating profit in the absence of additional capital.
2) Invested capital into new projects get a return greater than the cost of existing capital.
3) Attractive capital from business activities that are not profitable.
Increased operating profit in the absence of additional capital means that management can use company assets efficiently to gain optimal benefit.
EVA excellence as the company's financial performance measurement include: (Govindarajan, translator Kurniawan, 2002).
1) By EVA, all business units have a profit target for the same investment ratio.
2) With the increase in EVA then investai-investment will generate earnings above the cost of capital that would be more attractive to managers to invest in the company.
3) The existence of different interest rates can be used for different types of assets.
4) EVA has a strong positive correlation to changes in the market value of the company.

EVA excellence according to Teuku Mirza, 1997 ie EVA assessment focuses on adding value by taking into account the burden of the cost of capital as a consequence of the investment. With the inclusion of the cost of capital, it can be known whether the company can create value or not. EVA is the excess can be used independently without the need for comparable data.

4. Weakness EVA (Economic Value Added)

Besides several advantages above, EVA also has the disadvantage of EVA only describe the creation of value in a particular year period. Whereas the value of the company is the accumulation of EVA over the life of the company. So that a company has a value of EVA in certain periods of positive but lower value of the company because the value of his future negative EVA. (Main, the Goddess, 2002).

EVA weaknesses according to Teuku Mirza (1997):

1. EVA measures only the final result. This concept does not measure the activities of determinants such as loyalty and customer retention rates.
2. EVA too rests on the belief that investors are relying on a fundamental approach in reviewing and making a decision to buy or sell a particular stock, when other factors are sometimes more dominant.
3. EVA is highly dependent on the internal side of transparency in the calculation accurately.
4. To assess the company, EVA calculation not only the period of the present but also includes future periods. This is because the EVA in a given year shows the creation of value for the year. While the value of the company shows the present value of the total value creation over the life of the company.
5. Based on valuation models Ohlonson Edward-Bell, Lee (1996) states that the value of the company can be expressed as the sum of the total invested capital plus the present value of the total EVA company's future:

Total enterprise value = invested capital + present value of EVA
future.

The equation above clearly shows that the higher the EVA that will raise the value of the company, where the value creation will be reflected in a higher stock price. On the contrary, and the value of the company is lower than the total capital invested if the total EVA produced by the company is negative. We can predict when a company produces a total EVA positive or negative by comparing the ratio between the market value (market value) company with a total value of capital invested in the company.

The market value reflects the value of the company; thus the company to the present value positive EVA will have a ratio of more than one company, while a negative value will have a ratio less than one.

EVA = Net Profit After Tax - Cost of Capital


Benchmark EVA
According to Billy Vitello (1993) EVA assessment can be expressed as follows:
If EVA> 0, the mean value of the positive EVA indicates there has been a process of adding value to the company.
If EVA = 0 indicates posisisi breakeven or Break Event Point.
If EVA <0, which means a negative EVA showed no added value process occurs.
So that the above will more easily be translated as follows:
TABLE 2
EVA Value Definition
Company Earnings

EVA> 0
There is more economic value, after the company pay all obligations on donors or creditors in accordance expectations. Positive

EVA = 0
There is no more economic value, but the company is able to pay all its obligations on donors or creditors in accordance expectations.
Positive

EVA <0
Companies can not afford to pay duty on donors or creditors sebagimana expected value expected rate of return can not be achieved.
Can not be determined, but
if there is any profit, it is not appropriate
expected

From the brief description above, it can be deduced, that basically the approach of EVA (Economic Value Added) serves as:

1. indicator of the value creation of an investment.
2. indicator of a company's performance in each of its economic operations.
3. A new approach to measuring the performance of the company with regard fairly donors or shareholders.

Calculation of EVA (Economic Value Added)
The steps used in calculating EVA (Economic Value Added) in more detail are as follows (Mike Roussana, 1997):
a. Calculating Cost of Debt:

`The cost of debt (cost of debt) or Kd is the rate that must be paid by the company in the market at this time to get a new long-term debt. The company has several packages debentures with interest expense diverse and precise way to calculate the weighted (Weight). The payment of interest by the company will reduce the amount of taxable income (PKP), then Kd should be corrected by the factor (1-t) with t = rate of tax imposed. Based on the Law of taxation on corporate profits research period before tax (earnings before tax) will be subject to a progressive tax of 10%, 15%, 30%. So it can be formulated into:

Kd = Cost of annual interest
Total Long-Term Debt

According to Brigham, (2001) the cost of debt is derived from the after-tax cost of debt, Kd (1-t). Cost of debt is the relevant cost of new debt, given the ability to reduce the tax rate used to calculate the cost of capital weighted average (WACC). This calculation is the same as the Kd multiplied by (1-t), where T is the marginal tax rate of the company.

Debt component costs after tax = rate - Tax savings
Kd = - Kd T
= Kd (1-T)

Reasons for the cost of debt after taxes in calculating the cost of capital weighted average is as follows. The value of shares of the company, we want to maximize, depending on cash flows after tax. Because interest is a deductible expense, the interest yield tax savings that reduce the cost of net debt, which makes the after-tax cost of debt is smaller than the cost of debt before taxes. Cost of debt is the interest rate on new debt, not for the debts that are still outstanding, in other words the cost of what we need is the marginal cost of debt.

b. Counting the Cost of Equity.

The cost of equity capital is often called the cost of equity or Ke. When investors hand over their funds in the form of equity to companies they are entitled to receive a dividend in the future at the same time serves as a partial owner of the company. The amount of dividend is not determined at the time of handing investor funds, but are not necessarily depending on the company's performance in the future. This is very different from the debt capital because there is certainty that the interest rate is approved. To calculate the need for an approach based on the prevailing market value rather than book value.

According to Brigham and Gapenski (1996) there are three methods of approach to
To determine the value of, among others:
• CAPM (Capital Asset Pricing Model)
Popular models are the capital asset pricing or CAPM. The method can be formulated:
Ke = risk free rate + Risk premium
= KrF + βI (Send-KRF)

This model sees the level of expected results investor with the formula KrF = risk-free rate of return results (risk free rate), S. = the expected rate of return on the market, and βI = Beta coefficient shares are shares of the company to the risk index i.

Cost components of equity:
a) Risk Free Rate = KrF

Is the risk-free interest rate. Where investments in instruments that have business year risk-free interest. It will certainly benefit as expected. As the size of the interest rate of the bonds used in this case is Bank Indonesia Certificates. This data was obtained from statistical journal financial and capital markets.

b) Market Return = S.

Is the market portfolio profit level or the overall market value. As used measuring the average rate of profit across the investment opportunities available in the market index. Market index used is the Composite Stock Price Index (CSPI). Data obtained from the Capital Market the Directory (CMD). How to get it is to collect the monthly JCI value then calculated as follows:

Market return (Send) = (i-month index - the index month i-1) / month index i
c. Beta = β

Beta of a stock is a measure of the volatility of the stock against the stock market average. This reflects the market risk as opposed to a company-specific risk can be reduced by diversification. Historical beta is obtained by performing a linear regression between the rate of return (stock return) shares or excess return of shares to be searched beta value of the excess return of portfolio market / market index (in this case the index used is JCI).

Y = β. X
Where:
Y = excess return of individual stocks (Kri - KRF)
X = excess return of the market portfolio (Send -Krf)
The definition of excess return is the difference between the rate of profit to the risk-free rate.
• Discounted Cash Flow Model (DCF)
This model saw Ke as the value of dividends or share price plus the percentage growth of the dividend (assuming a constant growth), wherein:
g = b (r), b or obtained retention ratio = (1 -Payout ratio), D1 = D0 (1 + g), P0 = stock price period to 0, r = rate of return
To = + g
To = Dividend Yield + b (r)
Ratio between D1 and P0 known as Dividend Yield.
• Bond Yield Plus Risk Premium Approach

Estimating the rate of return that would be obtained by adding a risk premium on the bonds, which the company bond yield obtained from the company that owns bonds (Kd) and the risk premium on this third approach is expected to exceed the value of the premium bond yield companies (Kd) with a view to attract investors to investment in riskier bonds.

To = Company own bond yield + Risk Premium
c. Calculating the Capital Structure of the Balance Sheet

Decisions regarding capital structure according to Brigham and Gapenski is very important in calculating the weighted average cost of capital. The change of the company's capital structure will affect the risk inherent in the company's common stock, which in turn affects the share price and the cost of retained earnings. Policy regarding capital structure involves a trade off between risk and return.

Higher risks due to the growing debt tends to lower the stock price, but the increasing rate of return is expected to raise the stock price. Company to establish an optimal capital structure will result in a balance between risks and returns that will maximize the stock price. Factors that influence decisions with respect to capital structure, such as:

1. The risk of the company's business is contained in the company's assets if it does not use debt.
2. the tax position of the company. The company uses debt in its operations because of the cost of interest paid can be deducted in the calculation of tax (tax deduxtible) thus lowering the real cost of debt.
3. the financial flexibility is the ability to add capital with reasonable requirements.
4. The capital structure used is the proportion of debt and equity proportion as a percentage of total debt and equity capital. The proportion of debt (WD) is obtained by dividing the company's debt with the amount of debt and equity capital then multiplied by 100%.

WD = X 100%

The proportion of equity (WE) is obtained by dividing the equity capital by the amount of debt and equity capital.

WE = X 100%

d. Calculating NOPAT

Net Operating Profit After Tax (NOPAT) or net operating profit after taxes is an adjustment of profit after tax. Large operating profit after taxes is not an impact on the profitability or risk of business now. In other words, both companies financed with debt and with equity capital NOPAT its value will be identical. Net Operating After Tax equal to net income / Earnings After Tax (EAT) were added together with Interest After Tax (IAT). In the calculation of NOPAT is assumed to have been carried out adjustments by adding the equivalent periodic changes in equity in earnings (Ruky, 1997). This is due to the unavailability of sufficient data and the complexity of the constraints of time and to get other adjustment factors.

So it can be formulated as follows:
NOPAT = EAT + IAT.
EAT = Net profit (Earnings After Tax).
IAT = Interest After Tax.
e. Calculating Rate of Return (r)
The rate of return or r (rate of return) is the rate of return that is used to assess the company's performance, as measured by the productivity of capital. Calculation of rate of return (r) approaches the operating net profit after tax (NOPAT) divided by invested capital.

r =

f. Calculating the cost of capital weighted average (C *)
Calculation of cost of capital weighted average (Weighted Average Cost of Capital) or C * using the sum product of the weights of components weighted debt and equity capital component of the overall capital structure of the company with the percentage of the cost of debt and cost of equity capital is its formulation as follows:
WACC = Kd x (1-T) x Wd + Ke x We
T = tax imposed by the government on the company.
Kd = Cost of debt
Ke = Cost of equity capital
Wd = proportion of debt
We = The proportion of equity capital
g. Calculating EVA (Economic Value Added)
EVA = NOPAT - c * x capital or EVA = (rc *) x Capital
r = rate of return
c * = Cost weighted average
Capital = the amount of funds available for the company to finance its business, which is the sum of total debt and equity.

7. Applications Calculation of Economic Value Added (EVA)
a. Calculation of Cost of Debt (Kd)
Cost of debt before tax was corrected by the following factors:
Kd = Cost of annual interest / Total long-term debt
Kd = 176,669,000,000 / 2,304,424,000,000 = 0.0767
The tax rate is obtained from the following formula:
T = Cost of Tax / Profit before tax
T = 35.495 billion / 195 730 000 000
= 0.181
The cost of debt after taxes is corrected by the following factors:
Kd = Kd x * (1-t)
Kd * = 0.0767 x (1- 0.181) = 0.0628
b. Calculation of Cost of Equity (Ke)
Using the approach of dividend yield plus the expected growth rate. The formula is:
To = Dividend Yield + g
To = Dividend Yield + (plowback ratio x r)
To = Dividend Yield + [(1-Dividend Payout) x r]
To = 0.0116 + [(1- 0.391) x 50.46]
= 30.742
c. Calculation of Capital Structure
Total Debt = 3,882,851,000,000
Equity (own capital) = 1.352.997.000.000
The capital structure used is the proportion of debt and equity proportion as a percentage of total debt and equity capital.
The proportion of debt (WD) is obtained by:

WD = X 100%
Wd = [Total Debt / (Total Debt + Equity)] x 100%
Wd = (3.882.851.000.000 / 5.235.848.000.000) x 100%
= 74.159
The proportion of equity (We) obtained by:

WE = X 100%
We = [Total Equity / (Total Debt + Equity)] x 100%
We = (1.352.997.000.000 / 5.235.848.000.000) x 100%
= 25.841
d. Calculation of NOPAT
NOPAT obtained by:
NOPAT = EAT + IAT.
NOPAT = + Interest Earning After Tax After Tax
Interest after Tax (IAT) is calculated by:
IAT = i (1-T)
Where:
i = annual interest fee
T = tax rate
NOPAT = EAT + (i (1 - T))
NOPAT = 160 496 000 000 + (176 669 000 000 x (1- 0.181))
= 305,187,911,000,000



e. Calculation of rate of return (r)
Calculation of rate of return (r) using the formula operating net profit after tax (NOPAT) divided by the capital invested Capital obtained from the sum of total debt and equity.

r =

r = NOPAT / Capital
r = 305.187.911.000.000 / 6.048.441.000.000
= 50.46
f. Calculation of the average cost of capital weighted (c *)
In calculating the cost of capital weighted average of (c *) using the WACC approach.
WACC = Kd x (1-T) x Wd + Ke x We
Where:
Kd = Cost of debt
Ke = Cost of equity capital
Wd = proportion of debt
We = The proportion of equity capital
T = Tax imposed on companies
WACC = [(0.0767 x (1- 0.181)) x 74.159] + [30.742 x 25.841]
= 60.813
g. EVA calculation
EVA is calculated by:
EVA = (r - c *) x Capital
Where:
R = return (rate of return)
c * = Cost weighted average
Capital = the amount of funds available for the company to finance its business, which is the sum of total debt and equity.
EVA = (50.46 to 60.813) x 6,048,441,000,000
= -62,619.509.670.000