The use of existing equity does have a significant cost. When considering ones personal economy, the consumption cost of existing capital should be highly valued. EVA© is a registered trademark of Stern Stewart & Co. |
Applying the EVA concept, management learned that they should be placing a cost on their existing capital - and that cost should often be greater than their cost to borrow (greater than debt.) If the average return on the stock market at the time was 12%, an investor would expect at least that rate of return on an (equity) investment in the company. If the company was only investing in projects with a 6% return, investors would dump their stock and look for companies that employed their capital more wisely - in order to generate market returns for their investors. |
No math presented on this screen. |