분야
docxPlease answer the three questions on the following page. Please read
carefully what is the question. Answer shortly, but remember to justify
your answers.
Please make sure mark clearly what questions and sub-questions you are answering: 1a, 1bi, 1bii, 2a, 2b, 3a, 3bi, 3bii, 3c
Question 1
What is the difference between ROCE (Return on Capital Employed) and EVA? Please explain shortly. (Note: You do not need to write down the formulas)
In large, ROCE is a proportion which divides EBIT by capital and EVA is an amount which minus capital charge from EBIT. So common driver for both is EBIT. And also both they are the financial performance measurement that reflects BS, PL and cash flow of the company. While there is some correlation, there are also differences between them.
EAV is a measure based on residual income technique. It represents that real value is created when additional returns are generated for shareholders above their required rate of return. So only when ROI(or ROCE) exceeds WACC(or required rate of return), it could create economic values. Namely, profitability of the investment should be higher than the cost of the invested capital which a company incur to the lenders and shareholders. So ROCE is one of the main drivers of EVA but ROCE doesn’t reflect the cost of the capital.
One distinctive difference is that EVA reflects the cost of equity and debt. Specifically, the cost of equity reflects the risk-free interest rate and market risk premium of the certain company so that we could take into account not only overall market condition but also company specific risk.
Give reasons
