Infosys Technologies, introduced in Chapter 1, regularly provides investors with a performance measure called economic value-added (EVA). Originally pioneered by GE, EVA measures the profitability of a company after deducting not just the cost of borrowing but also the firm’s cost of equity capital. So EVA is the after-tax return on capital employed (adjusted for the tax shield on debt) less the cost of capital employed. Companies that earn a higher return on capital employed than its cost of capital create value for its shareholders. Those that do not destroy shareholder value. Reproduced below is EVA calculations for Infosys for 2006.
Required:
1. Did Infosys create value for its shareholders?
2. Is EVA a useful performance metric relative to net income? (Compare PAT or profit after tax, and EVA to average capital employed.)
| Cost of capital: | |
| Cost of risk-free debt (%) | 7.5 |
| Market premium | 7 |
| Beta variant | 0.78 |
| Cost of equity (%) | 12.96 |
| Average debt/Total capital (%) | — |
| Cost of debt – net of tax (%) | NA |
| Weighted average cost of capital (%) | 12.96 |
| Average capital employed | 6,177 |
| PAT as a percentage of average capital employed (%) | 40.14 |
| Economic Value Added: | |
| Operating profit (excluding extraordinary income) | 2,654 |
| Less: Taxes | 313 |
| Less: Cost of capital | 801 |
| EVA | 1,540 |
| Ratios: | |
| EVA as a percentage of average capital employed (%) | 24.93 |
Economic Debate- Progressive Income Tax For this Economic Debate, we are going to discuss the…
TOPIC: Going Global Discussion Thread 1 (initial post due Wednesday for full credit) Please note:…
Assignment Topic This week will culminate in the creation of a narrated PowerPoint to create…
The Assignment must be submitted on Blackboard (WORD format only) via allocated folder. Assignments submitted…
you need to post your 2-page information flier to share with your Final Project Group.…
discussion: Discuss the methods used at your company to measure and ensure quality products and…