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Defining capital costs correctly...
- Capital costs and solvency ratio
- Capital costs should always be defined with target solvency ratio and not with actual solvency ratio because
otherwise units can improve their EVA with unproductive investments (by financing them with debt). The steering
should operate as if every single dollar invested more in business would be financed with a target blend of debt
and equity
- All the assets cause capital costs
- In order to calculate EVA correctly must all the capital be allocated to units. Usually ROI is calculated
so that only capital affectable to units is taken into account. With EVA this same procedure can not be used. If
all the capital is not taken into account then the EVA-figures are upward biased (with ROI this has not caused
any harm since the level of ROI has not been important)

Slide 3 of 4