Wealth Added Index - WAI

DEFINITION of 'Wealth Added Index - WAI'

A metric designed by Stern Stewart & Co consulting firm that attempts to measure wealth created (or destroyed) for shareholders by a company. The WAI takes into account more variables than just the profits or share growth of a company. According to this theory, wealth is created only if the returns of a company exceed its cost of equity.

BREAKING DOWN 'Wealth Added Index - WAI'

Financial theory says that the cost of equity for a company should be greater than the return available on risk-free securities such as government bonds because a company is riskier. (The greater the risk an investor assumes, the greater the return he or she should require.) So, if a company's returns don't exceed its cost of equity, then shareholders should invest their money elsewhere.

In other words, according to the WAI, if return is less than the cost of equity, the company is actually destroying shareholder value.

RELATED TERMS
  1. Return

    The gain or loss of a security in a particular period. The return ...
  2. Return on Market Value of Equity ...

    Return on market value of equity (ROME) is a comparative measure ...
  3. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  4. Shareholder Value Transfer - SVT

    A metric intended to guide shareholders in how much equity compensation ...
  5. Cost Of Equity

    In financial theory, the return that stockholders require for ...
  6. Shareholders' Equity

    A firm's total assets minus its total liabilities. Equivalently, ...
Related Articles
  1. Investing

    What is the Shareholder Equity Ratio?

    The shareholder equity ratio shows how much money shareholders will receive if a company has to liquidate its assets.
  2. Financial Advisor

    Do You Need Wealth Management?

    Wealth management is a service that combines financial and investment advice, accounting and tax services, and legal and estate planning.
  3. Investing

    Who is a Shareholder?

    A shareholder is a person, company or other entity that owns at least one share of a company’s stock.
  4. Markets

    Cost of Equity

    The cost of equity is the rate of return an investor requires from a stock before exploring other opportunities.
  5. Managing Wealth

    How to Measure Wealth

    Wealth is the value of all assets a person, company, country or other entity owns, minus all owed debts.
  6. Financial Advisor

    How Big Is the Wealth Management and Financial Advisor Industry?

    Learn about the world's $74 trillion in managed assets, and why the wealth management industry is drastically different following the financial crisis of 2007-2008.
  7. Investing

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  8. Investing

    Calculating the Equity Risk Premium

    Equity risk premium is the excess expected return of a stock, or the stock market as a whole, over the risk-free rate.
  9. Managing Wealth

    What Investors Should Know About Interest Rates

    Understanding interest rates helps you answer the fundamental question of where to put your money.
  10. Investing

    Economic Value Added - EVA

    Learn about this metric that measures a company's financial performance based on its residual wealth.
RELATED FAQS
  1. What is the difference between cost of equity and cost of capital?

    Read about some of the differences between a company's cost of equity and its cost of capital, two measures of its required ... Read Answer >>
  2. What is the difference between economic value added and market value added?

    Economic value added (EVA) is a performance measure developed by Stern Stewart & Co that attempts to measure the true ... Read Answer >>
  3. What is the difference between a company's equity and its shareholders' equity?

    Understand the difference and the interrelationship between shareholders' equity in a company and the company's actual total ... Read Answer >>
  4. What does it signify about the state of a company if it has unusually high shareholders' ...

    Understand the meaning and calculation of shareholder equity and what a high level of shareholder equity signifies about ... Read Answer >>
  5. What is the difference between cost of debt capital and cost of equity?

    Learn about how the costs of debt and equity capital differ and how to calculate each using interest and tax rates and stock ... Read Answer >>
  6. What is the difference between the cost of capital and required return?

    Take a look at the primary conceptual differences between an investor's required rate of return and an issuing company's ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  5. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  6. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
Trading Center