And before we actually look into these numbers,

let me say that I made a few assumptions just to simplify the example a little bit.

But the numbers are fairly accurate, and they actually,

you'll see that they go where they want to go and we're going to try to get

a company that is clearly creating value and one that may be destroying value and

so that's basically what we going to try to put together with this example.

So let's start with Apple.

Apple in May 2014, at that point in time,

the company was generating a NOPAT of almost $40 billion.

Now Apple, as you know, in terms of market value is the largest company in the world.

In terms of revenue, it generated $176 billion back in the year 2013.

And out of that, 40 billion of that, almost 40 billion were profit.

So we're going to start from a note about a 39.8, almost 40 billion dollars.

Now, they did so with a lot of capital.

They have a lot of capital invested over $120 billion, so

almost $121 billion of capital invested, and if you calculate the cost of capital,

we're not going to go into the nitty gritty now, its about 7%.

A little bit lower than 7%, 6.8%.

Now, knowing the NOPAT, the capital, and

the WACC, we know that we can actually calculate everything else.

But before we do it, because we're going to calculate the EVA with both

expressions, lets calculate the return on capital.

And as you remember, that is simply,

in this framework, the NOPAT divided by the capital, so the $39.8 billion

divided by the $120.8 billion, and that gives you a round number of 33%.

Now, we could stop the calculations here.

We're dealing with a company that has a return on capital of 33% and

a cost of capital of 7%.

They're creating huge value.

And now we can still run the EVA numbers, but we could

stop here whether we're asking the question of they're creating value or not.

Of course, they are.

They are beating the cost of capital by a huge margin.

They're creating a big gap of over, well over 20 percentage points.

Now, if we still want to calculate the numbers, expression number one.

NOPAT $39.8 billion minus the $120.8 billion

of capital invested multiplied by the 6.8 cost of capital.

That gives me, remember, that second part, the capital of 100 and

almost $121 billion multiplied by the cost of

capital of almost seven percent gives me the capital charge.

And so, the minimum amount of money that the capital providers actually would

expect would be $8.2 billion.

But, guess what?

Apple is generating $39.8 billion.

So, it's got to compensate the capital providers and then some.

And the excess of how much more money they

have is the $31.65 billion that you're seeing there.

In other words, they need to deliver at least $8.2 billion in terms of cash.

They deliver almost $40 billion of cash, therefore, they produce $31, almost $32,

billion dollars more than they should from the point of view of value creation.

The second expression highlights what we were saying before.

And what we were saying before is that when you look at the spread between

the return on capital of 33% and the cost of capital of almost 7%,

well you have a 26 percentage points, a gap between one and the other.

And if you actually apply $121 billion of capital to that spread,

you go back to the same number we calculated before,

Apple is generating $31.65 billion of economic profit.

That is profit beyond what capital providers were requiring for

providing that capital in the first place.

So in this framework, if you believe this whole idea of residual income,

economic profit, EVA, we can clearly say that last year Apple create,

clearly Apple created value.

Now, let's compare that to Yahoo.

Situation of Yahoo is a little bit different.

Yahoo, first, is a much smaller company.

They have actually $4.7 billion of revenue, out of which they actually

created about $180 million in profits, about 179 million dollars in profits.

Now, in order to create $179 million in profits, they used capital, and

they used $12.8 billion in capital.

Far less than Apple, about one-tenth the amount of capital that

Apple actually used, but the problem is that they have a higher require return,

which is actually pushing at 9%.

And before we actually keep on with the calculations,

remember that we can calculate one more thing, and

that is what we call the Return Capital, the NOPAT divided by the capital.

So if we divide the 879 million by the $12.8 billion in capital,

we get a return on capital of 6.8%.

And we're going to keep going, but we could stop right there.

And the reason that we could stop right there is that if you have a company that

has a return on capital of less than 7% but it has a cost of capital of almost 9%,

well, you know, you're investing resources but

you're not creating enough return to satisfy the capital providers.

Be that as it may, we can calculate the EVA with expression one,

and creating that the EVA with expression one would be the NOPAT,

$879 million minus the capital invested which is $12.8 billion,

multiplied by the cost of capital of 8.9%.

And if we multiply that $12.8 billion by 8.9%,

we get a $1.1 billion capital charge.

Now where's the problem?

That capital providers are requiring at least $1.1 billion, but

Yahoo provided them with less than $880 million.

So there was a shortage of $260 million, and that is what,

in this framework, we would create value destruction.

The capital providers were expecting $1.1 billion, Yahoo provided

them with 180 billion, so there was a shortage there of $260 million.

Or we can look at this with a second expression.

And the second expression, as we clarified before, says that we look at the spread,

which is 6.8 and with respect to 8.9.

That basically means that there's a negative spread of over two

percentage points.

And if we apply capital to any activities in which we have a negative spread,

we're going to destroy value, and that value destruction is going to be,

obviously, the same number as before, and that is going to be $260 million.

In other words, in this framework, we would say that Yahoo destroyed value.

So we looked at two companies, Apple and

Yahoo, at the same point in time based on figures for 2013.

And we're saying, well at this particular point in time,

Apple was creating value because it had a positive and huge EVA, and

Yahoo was destroying value because it did have a negative EVA.