Practice: The capital base in calculating EVA

• From the assets side all the items tie capital and thus all the items should have a cost of WACC
  • Thus no asset item should be excluded e.g. because SBU managers can not affect them
  • It is important that all the assets are treated similarly i.e. all the assets have as big cost (WACC) no matter of their nature (working capital, fixed assets etc.)
• The capital costs are however not so big as WACC times total assets since company has also non-interest-bearing debt which do not have any capital costs
  • These non-interest-bearing liabilities should be credited with a revenue item since they provide the company with capital which would otherwise have to be acquired from the alternative sources. Thus these items (accounts payable, deferred liabilities) should be credited with WACC
    • (if we want to be very precise then the crediting should be only on the level of debt cost since non-interest bearing liabilities are debt and increasing them must (in extreme) mean also increasing equity i.e. you can not finance all the operations with non-interest bearing liabilities )

Slide 4 of 7