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Cost of Debt Cost of Capital ? % + Cost of Equity ? % ? % The cost of capital comprises both debt equity costs Risk Free Rate Equity Risk Premium Debt Premium (Credit spread) Cost of Equity Capital (required return byequity holders) Risk (?) Risk-Free Rate Rf Market Risk PremiumMRP(Rm - Rf ) } Relationship between Risk and Return Market Risk = 1 Cost of Equity = Rf + (Beta x MRP) A Beta value is required to determine cost of equity In general, a higher business risk implies higher beta value, hence higher cost of equity To calculate Beta, a list of peers need to be identified for {Client} A peer company is not necessarily a competitor, but rather a company engaged in principally similar business subject to the same underlying economic forces. They may be competitors or companies in similar industries and business environments. Peer comparisons are used to : Derive Betas for the respective business units and the corporation to facilitate cost of capital (COC) calculations. Non-listed companies, wholly-owned subsidiaries and business units do not have publicly traded shares from which to measure the levered Betas. Where possible, a pure-play analysis of publicly traded peer companies is used to estimate the unlevered Beta, or BRI. This is then translated into the levered Beta for that company, using the capital structure and the cost of debt. Benchmark EVA performance and identify value drivers. Contents What is EVA? The calculation of EVA The EVA management system * Strategy Formation Goal Setting Planning Budgeting Execution Evaluation Motivation EVA EVA EVA EVA EVA Value Based Management EVA provides a comprehensive value management framework to translate strategy into action From EVA Goal Setting to Execution EPS Consensus Estimates Industry Data Benchmarking Internal forecasts Simulations of past history {Client} Strategic Goals Consolidated EVA Growth Goal Business Unit EVA Growth Goals Operating Plans Capital Plans Results/Outl