Economic profit = Net operating profit after taxes - Cost of capital
Operating profit after depreciation and amortization
+ Implied interest expense on operating leases
+ Increase in LIFO reserve
+ Goodwill amortization
+ Increase in bad debt reserve
+ Increase in net capitalized research and development
- Cash operating taxes
_________________________________________
NOPAT
Note: See Peterson and Peterson [(Research Foundation, AIMR 1996) Table 3.1, p. 14] for more detail and an example of this calculation.
Book value of common equity
+ Preferred stock
+ Minority interest
+ Deferred income tax reserve
+ LIFO reserve
+ Accumulated goodwill amortization
+ Interest-bearing short-term debt
+ Long-term debt
+ Capitalized lease obligations
+ Present value of non capitalized leases
_______________________________
Capital
See Peterson and Peterson [(1996), Table 3.3, p. 19] for more detail and an example of this calculation.
NOPAT = $900 million
Cost of capital = 10%
Capital = $8,900 million
Economic profit = $900 million -
890 = $10 million
| Item | 20Y2 | 20Y1 | Change |
| Book value of common equity | $ 4,000 | $ 3,700 | + $300 |
| Book value of preferred equity | 300 | 300 | 0 |
| Book value of debt | 5,200 | 5,000 | + $200 |
| Book value of capital | $ 9,500 | $ 9,000 | + $500 |
| Mkt value of common equity | $15,000 | $12,000 | +$3,000 |
| Est. mkt value of capital | $20,500 | $17,300 | +$3,200 |
| Market value added | +$11,000 | +$8,300 | +$2,700 |
| 1996 | 1995 | ||||||||
| Company |
|
|
|
|
|
| |||
| Coca-Cola | $87,820 | $2,140 | $9,276 | 12.0% | $60,846 | $1,884 | $8,468 | 10.0% | |
| TRW | $710 | -$70 | $5,563 | 12.1% | $324 | -$151 | $5,433 | 12.0% | |
| Ford Motor | -$12,915 | $1,591 | $55,995 | 9.8% | -$13,757 | $985 | $54,160 | 12.9% |
Source: Ronald B. Lieber, "Who are the Real Wealth Creators?" [Fortune, December 9, 1996, pp. 107-116] and Anne B. Fisher "Creating Stockholder Wealth," [Fortune, December 11, 1995, pp. 105-116].