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I just read "Stern Stewart's EVA" by Al Ehrbar. It looks like a management tool to incent employees to be aligned with shareholders for creating wealth for the company they work for.
TO calculate EVA : Net operating profit after taxes - ((Net Working Capital + Fixed Assets) * The cost of capital).
I was wondering how you find out what the cost of capital is for a corporation. I know we can find out how much their cost of debt is by looking at the bonds a company has outstanding and their rate of return, however how does one find out or calculate the cost of equity capital to then determine the cost of capital for a firm. Even if one can figure this out and find out a corporations EVA and then compare it to years previous is it a valuable index for determing the valuation of a company? Then using it as a criteria to choose a stock.

Thanks to anyone who can help me out with this one!

JV
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I was wondering how you find out what the cost of capital is for a corporation.

The Boring Port board would be the best place to discuss this. But, the short answer for me is to use about 11% as that's the historical rate of return of the market.

There's actually a formula for it, but I don't recall it off the top of my head.

Phil
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jmviap wrote: I was wondering how you find out what the cost of capital is for a corporation. I know we can find out how much their cost of debt is by looking at the bonds a company has outstanding and their rate of return, however how does one find out or calculate the cost of equity capital to then determine the cost of capital for a firm.

JV-

The weighted average cost of capital (WACC) for a company is calculated as follows:

(Cost of Debt)*(1-T)*(D/A) + (Cost of equity)*(E/A)
where:
Cost of Debt = Weighted average of all outstanding debt
T = Tax Rate
D/A = ratio of debt to assets
Cost of Equity = Return on Equity (5 year appreciation + dividends is a good approximation)
E/A = ratio of equity to assets

That being said, its interesting to note that many companies use a benchmark, or desired rate for EVA calculation instead of the actual rate. For instance, Coca-Cola uses 12% as its worldwide WACC. Why? Its 1% per month. Simpler is better.

Steve (Simple Simon)
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Sorry.

Cost of Debt = Weighted average of all outstanding debt

Cost of Debt = Weighted average interest rate of all outstanding debt...

Steve
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The fastest way to calculate a company's cost of capital for EVA is to use a financial metric called "beta" that can be found on many web sites (including TMF!).

The formula is:

Cost of capital = risk-free rate + beta * (equity risk premium)

I typically use 1-year T-bills for the risk-free rate. Long-term average is about 6%.