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Kashif Iqbal
Student (University)
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What is the Impact of Debt on EVA?
What is the impact debt is having on EVA? Thanks for your help.
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Jaap de Jonge
Editor, Netherlands
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The Influence of Debt on EVA Having debt costs money (interest).
The payments for the debt are part of the 'Capital charges' in the formula in the article.
So the higher the debt, and the higher the interest rate on that debt, the lower the EVA will be.
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GUMB
Professor, France
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Debt Often Increases EVA Jaap's answer is partially OK. But having no debt also costs money: it is what they call cost of equity.
Often the latter is higher than the cost of debt. Thus the resort to debt often increases EVA.
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Jaap de Jonge
Editor, Netherlands
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The Impact of Debt in EVA @Gumb : Ah yes, you mean to say that it's better from an EVA point of view to acquire $ 1 million through taking debt, than collecting the same amount through shares (equity), because the costs are higher in the case of equity (shareholders require a premium to compensate for the risk they take).
I answered the question only directly, without considering that an alternative may be needed.
Thanks for your very good build for the answer to this question!
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Mostafa Eldiwany, Egypt
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Debt Effect on Cost of Capital and the Levered Beta @Jaap de Jonge (Editor): I do believe that taking a lot of debt will increase the beta if it is levered to the company's debt to equity ratio.
Hence that increases the cost of equity as well. Also consider the pressure debt will put on your cash flow and the increase of financial risk.
So I agree that debt increase has to be dealt with with extreme caution. Thank you.
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Mehul Doshi
CxO / Board, India
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Metric of Debt to Equity a Crucial Parameter for EVA Whether debt is good or bad is subjective. But if the ratio is skewed and not balanced it definitely has an impact on EVA. Debt to equity ratios in a capital intensive industry hence are benchmarked differently compared to knowledge led industry.
When an industry moves towards agility, the growth parameters also need to be balanced.
EVA maturity to take this parameters is evident if the input of the above are appropriately provided or considered.
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