2. Value Creation: Am I Really Creating Value?

3. Objectives Value Creation and Economic Value Added (EVA) Calculate EVA Interpret EVA

4. Economic Value Added (EVA) Economic profit A measure of value added Better than ROE as an indicator of creation of value Calculation reflects the idea that firm must earn enough to cover the cost of debt and the opportunity cost of equity before it even begins to create value

5. Calculation of EVA Earnings Before Interest Less Interest Equals Net Farm Income Less Labor and Management Charge Equals Net Income Less Cost of Equity Capital Equals Economic Value Added

6. EVA Calculation: MBC Farms Debt Earnings before Interest$379,235 - Interest$98,716 Net Farm Income$280,519 - Labor and Managerial Charge$150,000 = Net Income$130,519 - Cost of Equity Capital (10%)$128,736 = Economic Value Added$1,783 Calculated on cost valuation basis

7. Cost of Equity Capital Required Rate of Return x Net Worth Return your equity must generate to remain invested

8. Interpreting EVA A positive EVA means the firm generated a return to invested capital that exceeds the opportunity cost of capital – The “value” of the firm should increase A negative EVA means the firm did not generate sufficient return to cover it’s cost of capital – The “value” of the firm should decline The absolute value of EVA is less important than the trend in EVA

9. Diagnostics: Ways to Raise EVA Earn more profit without using more capital Employ less capital Invest capital in projects with greater return potential Change capital structure to reduce capital cost

10. Sample EVA Calculation DebtNo Debt Earnings before Interest$379,235 - Interest$98,7160 Net Farm Income$280,519$379,235 - Labor and Managerial Charge$150,000 = Net Income$130,519$229,235 - Cost of Equity Capital (10%)$128,736$353,024 = Economic Value Added$1,783$(123,789) Calculated on cost valuation basis

11. Strategic Business Planning for Commercial Producers