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    Economic Value Added

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    manish singh rana
    Economic Value Added (EVA) is a specific metric for calculating economic profit. It measures value creation; is based on the foundation that to create value a company must earn more than its cost of capital. It causes the manager to adopt the mentality of a business owner, adopt sound long-term decisions.

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    Economic Value Added

    Uploaded by

    manish singh rana
    408 views14 pages
    Economic Value Added (EVA) is a specific metric for calculating economic profit. It measures value creation; is based on the foundation that to create value a company must earn more than its cost of capital. It causes the manager to adopt the mentality of a business owner, adopt sound long-term decisions.

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    Economic Value Added (EVA) is a specific metric for calculating economic profit. It measures value creation; is based on the foundation that to create value a company must earn more than its cost of capital. It causes the manager to adopt the mentality of a business owner, adopt sound long-term decisions.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    408 views14 pages

    Economic Value Added

    Uploaded by

    manish singh rana
    Economic Value Added (EVA) is a specific metric for calculating economic profit. It measures value creation; is based on the foundation that to create value a company must earn more than its cost of capital. It causes the manager to adopt the mentality of a business owner, adopt sound long-term decisions.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
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    At a glance
    Powered by AI
    The key takeaways are that EVA measures economic profit by determining if a company is generating returns above its cost of capital, and it is used widely by corporations as a performance metric.

    EVA stands for Economic Value Added. It is a metric that calculates economic profit by taking a company's adjusted net operating profit after tax and subtracting its cost of capital charge. The cost of capital is determined by the weighted average cost of capital.

    Advantages of EVA include that it is transparent and easy to calculate, flexible to adapt across industries, and causes managers to adopt the mentality of business owners focused on long-term value creation. EVA is also used for capital allocation, performance measurement, and executive compensation.

    Economic Value

    Added
    Definition
     New York based financial advisory Stern
    Stewart & Co. postulated the very concept
    of Economic Value Added (EVA) in 1990.

    • EVA : Maximum amount which the


    business is capable of distributing to its
    shareholders while remaining in the same
    position at the end of the period as it was
    at the beginning with fair practices. 2
    WHAT IS EVA TM
    ?
     EVA is a trademark of Stern Stewart & Co.
    is a specific metric for calculating
    economic profit.

     Enables the direct alignment of


    management and shareholders interest-
    “RICE,V.A.”

    3
    Necessity of E.V.A
    It provides a suitable
    framework for:

     The allocation of capital


    among business units

     measurement of corporate
    performance, and

     The determination of
    executive incentive
    compensation. 4
     It measures value creation;

     Eva is based on the foundation that to


    create value a company must earn more
    than its cost of capital.

    5
    EVA and its Components

    6
    7
    Computation of EVA
    EVA = ANOPAT -Cost of Capital

    • ANOPAT =Adjusted Net operating Profit


    after Tax
    • The project’s cost of capital is the
    minimum required rate of return on
    funds committed to the project.
    • The firm’s cost of capital will be the
    overall (WACC), required rate of return
    on the aggregate of investment projects
    the projects.
    8
    EXAMPLE – Consider the following firm:
     Sales $100,000,000
     Operating Profit $ 9,000,000
     Adjustments $ 1,000,000
     Debt $ 20,000,000
     Equity $ 40,000,000
     Tax Rate 30%
     WACC 10%
    Thus,
    – ANOPAT = $10,000,000 x (1 – 30%) = $7,000,000
    – Total Capital = $20,000,000 + $40,000,000 =
    $60,000,000
    – Capital Charge = 10% WACC x $60,000,000 = $6,000,000
    – Economic Value Added = ANOPAT - Capital Charge, =
    $7,000,000 -$6,000,000 = +$1,000,000 9
    Advantages of Economic Value Added
    • Transparency / Ease of Use
    - Easy to calculate.
    -Less subject to manipulation than earnings per
    share.
    -It is less variable than accounting earnings.
    • Flexible
    - Can easily be adapted across industries
    - Adjustments to net operating profit can be
    custom
    - tailored to reflect company specific fact sets.
    10
     Conceptual

    - Measuresif an executive is
    generating company
    earnings greater than a
    comparably risky portfolio
    of debt and equity.

    -EV A causes the manager


    to adopt the mentality of
    a business owner, adopt
    sound long-term decisions 11
    EVA Deficiency
     Not easy to use (for calculation of PAT,
    some 144 adjustments are there) too
    complicated for small business.

     Recommends inexpensive debts in order


    to reduce cost of capital (COC), is a very
    questionable strategy for small business.

     A passive accounting tool : measures past


    performance. 12
    Review of Lterature
     FORTUNE magazine
    has called EVA
    “today’s hottest idea”.

     Peter F. Drucker
    commented in
    HBR:EVA measures
    “total factor
    productivity”.
    13
    Conclusion
    we can definitely say that EVA™ has emerged as a
    powerful conceptual framework and is practically
    implemented in most of successful corporations
    across globe. Which incorporates balance sheet data
    into an adjusted income statement metric which
    works best for companies whose tangible assets
    (assets on the balance sheet) correlate with the
    market value of assets - as is often the case with
    mature industrial companies.

    14

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