[Evan]

Good post. Just a couple things I'd like to point out.

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I’ll also point out that Berkshire and Coke (as mentioned by Evan) are not nearly the only firms who think in this manner.

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Berkshire is not an EVA firm. I'm not totally sure if you meant to say they were, but I just wanted to clear it up.

Second, pretty much everyone who doesn't like the EVA method has the same reason; it maximizes firm value, not equity value. I've never heard either of the Berkshire managers talk about their specific reasons, but I would be shocked if this wasn't it.


Other than that I think I agree with everything you wrote. Hopefully someone here willl turn out to be an EVA supporter (from a management perspective). That should turn out to be an interesting debate.

Oh, one more thing. I just wanted to make it clear that the net cost of capital here is an after tax weighted average of debt and equity (only saying this because your notation was a little unclear imo). So it would be something like this:
Cost of capital (WACC) = Cost of equity * (equity/equity+debt) + After tax cost of debt * (debt/debt+equity)

After tax cost of debt = Cost of debt * (1 - effective tax rate)


I think Stern Stuart uses book weights for debt and equity, but someone please correct me if I'mm wrong. Most Wall St. firms use market weights; that is another source of debate with the EVA approach because it will yield a different optimal capital structure and a different cost of equity assuming you use a built up beta.