Customize Consent Preferences

We use cookies to help you navigate efficiently and perform certain functions. You will find detailed information about all cookies under each consent category below.

The cookies that are categorized as "Necessary" are stored on your browser as they are essential for enabling the basic functionalities of the site. ... 

Always Active

Necessary cookies are required to enable the basic features of this site, such as providing secure log-in or adjusting your consent preferences. These cookies do not store any personally identifiable data.

No cookies to display.

Functional cookies help perform certain functionalities like sharing the content of the website on social media platforms, collecting feedback, and other third-party features.

No cookies to display.

Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics such as the number of visitors, bounce rate, traffic source, etc.

No cookies to display.

Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.

No cookies to display.

Advertisement cookies are used to provide visitors with customized advertisements based on the pages you visited previously and to analyze the effectiveness of the ad campaigns.

No cookies to display.

Connect with us

Hi, what are you looking for?

slide 3 of 2

Wealth Added Index (WAI): What It is, How It Works

File Photo: Wealth Added Index (WAI): What It is, How It Works
File Photo: Wealth Added Index (WAI): What It is, How It Works File Photo: Wealth Added Index (WAI): What It is, How It Works

What Does the Wealth Added Index Mean?

Wealth Added Index (WAI) is a metric designed by Stern Value Management, a consulting firm, that attempts to measure value created (or destroyed) for shareholders by a company.

The consulting firm Stern Value Management invented the Wealth Added Index (WAI), a tool that aims to quantify the value a business creates or destroys for its shareholders. This method of computation states that wealth is produced only when a company’s returns—which include dividends and increases in share price—are more significant than its cost of equity.

Understanding Wealth Added Index (WAI)

The Wealth Added Index’s underlying theory is that since a firm carries a higher level of risk than risk-free products like government bonds, its cost of equity should be higher than the return on such securities (the more significant the chance that investor accepts, the greater the return needed). A company’s stockholders should make another investment if its returns do not outweigh its cost of equity. Put differently, the WAI states that a corporation is decreasing shareholder value if the return is less than the cost of equity and increasing shareholder wealth if the return is more than the cost of equity.

Because it compares returns to the cost of capital, WAI and Economic Value Added (EVA), another Stern Value Management metric, are comparable. Traditional accounting return measurements ignore the cost of capital to generate these returns over a specific period, such as return on equity (ROE) and return on assets (ROA). A corporation may have a high return on equity (ROE); nevertheless, if the cost of capital required to get that ROE was much higher, the company’s value would be compromised.

However, WAI and EVA vary in two important ways. The first and most crucial point about EVA is that it only accounts for outcomes that have already happened. In contrast, WAI considers both the performance of the share price in the past as well as the performance in the future. The current share price of a firm’s stock will represent the likelihood of value creation, or wealth addition, in the future since the equity value of a company is the present value of all future cash flows. Second, since EVA depends on national accounting standards, it cannot provide comprehensive cross-border comparisons. Because various accounting rules are used to determine reported profits, for example, the EVA of a utility firm in the United States and Spain will not be directly comparable. WAI can overcome this restriction by concentrating on the movement of the share price and dividends, which are easily accessible for computation anywhere.

 

You May Also Like

Notice: The Biznob uses cookies to provide necessary website functionality, improve your experience and analyze our traffic. By using our website, you agree to our Privacy Policy and our Cookie Policy.

Ok