Capital structure of CVS Essay Example | Topics and Well Written Essays - 750 words

Capital structure of CVS - Essay Example Therefore, equity financing effectively increases the weighted average cost of capital. 3. Schedule out & calculate EVA. Is it good or bad and what brings EVA up & down for CVS There are various ways of measuring a firm's performance. One way is to use accounting measures such as return on equity, return on assets, etc. Another way is to use market measures and determine the firm's performance by looking at the stock's value. These measures, however, do not provide an effective evaluation of firm performance. One such measure that determines the true value-creating performance of a firm is Economic Vale Added (EVA) analysis. This analysis attempts to determine the net contribution to value by a company's investment decisions which other measures fail to provide. This means the after-tax returns of the company should exceed the cost of capital invested. EVA is calculated as follows: EVA = (ROIC - WACC) x Invested Capital Formula for Return on Invested Capital (ROIC): ROIC = Net Income / Liabilities + Shareholders Equity ROIC for CVS = 11.4% Invested Capital = market capitalization = 262,500,000 (common stock * share price) EVA for CVS is: 7,875,000 EVA is dependent on return on invested capital as well as the cost of capital. Higher ROIC and a lower cost of capital can increase EVA significantly. 4. Look at EVA & how do you need to change bank statements to create the best capital structure An EVA of 7,875,000 means this is the net contribution to value added by the company's investment decisions. Higher EVA can alter the capital structure by increasing the proportion of equity to debt. However, every company has a target in terms of maintaining... Weighted average cost of capital is the discount rate used to convert expected future cash flow into present value for all investors. Using the book value of debt and equity, CVS is 26.2% financed by debt and 73.8% financed by equity1. Cost of equity can be calculated using the capital asset pricing model. There are various ways of measuring a firm’s performance. One way is to use accounting measures such as return on equity, return on assets, etc. Another way is to use market measures and determine the firm’s performance by looking at the stock’s value. These measures, however, do not provide an effective evaluation of firm performance. One such measure that determines the true value-creating performance of a firm is Economic Vale Added (EVA) analysis. This analysis attempts to determine the net contribution to value by a company’s investment decisions which other measures fail to provide. This means the after-tax returns of the company should exceed the cost of capital invested. EVA is calculated as follows: Look at EVA & how do you need to change bank statements to create the best capital structure? An EVA of 7,875,000 means this is the net contribution to value added by the company’s investment decisions. Higher EVA can alter the capital structure by increasing the proportion of equity to debt. However, every company has a target in terms of maintaining an optimal capital structure that minimizes cost of capital and maximizes shareholder wealth. A higher equity and lower debt in the capital structure substantiates.