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Presentation On Economic Value Added EVA
Presentation On Economic Value Added EVA
Tata Steel
Enhancing Shareholder Value Vision 2007
• To seize the opportunities of tomorrow and create a future
that will make us EVA positive Company.
– Business strategies
– Capital projects
– Economic Return:
strategic thinking, capital
investment
EVA
– Accounting Returns:
operating decisions and
Accounting Economic
– Shareholders Returns: returns Returns
shareholder value
Why EVA
Cost of Debt: Avg. Interest RateX (1-Tax rate) X Avg. borrowed fund
Cost of Equity(Rate): Risk Free Debt Cost + (Market Premium X Beta Variant)
Market Premium Expected Return from the market - Risk free debt cost
• Beta
– Greater than one means that the Stock is more Volatile
than the Sensex
O p e r a t in g p r o f it
N e t o f
T a x e s
C o s t o f c a p it a l E m p lo y e d
C o s t o f E q u it y C o s t o f D e b t
A v e r a g e T a n g ib le CN oe st t W o of er t qh u i t y p e r c e n t a gA ev e r a g e b o r r o w P e o d s tf u t an dx c o s t o f
R is k f r e e d e b t c o s t
M a r k e t P r e m iu m
B e t a V a r ia n t
S t a n d a r d D e v ia t io n o f S t o c k / s c r ip t
S t a n d a r d d e v ia t io n o f S e n s e x
C o - e f f ic ie n t o f c o - r e la t io n
Object of EVA is to know
“ECONOMIC PROFITS”
What it measures
• Creating value
– The Company which earns Higher
Returns (Net Operating Profit After
Tax) than the Cost of Capital
ARE CONSIDERED AS
HAS “CREATED THE VALUE”
What it measures cont..
• Destroying value
– The company which earns Lower
Return (Net Operating Profit After Tax)
than the Cost of Capital
ARE CONSIDERED AS
Destroyers of Shareholders’ Value
Strategies for increasing EVA
Shareholder Performance
Communication Measurement
Capital
Budgeting Incentive
Compensation
Capital
Budgeting
EVA
EVA and market value of the
company
• Theoretically EVA is much better than conventional
measures in explaining the market value of the
company. Financial theory suggests that the market
value of a company depends directly from the future
EVA - Values:
• The key persons (Top and middle managers) have to understand and
commit to EVA thoroughly
– Without the full support of Managers there will not be substantial
results
– Good understanding helps to tailor EVA to the specific need of a
company
• EVA will be most beneficial if broken down into small parts
• Integration to incentive systems for all the employees is a good way
to make all the employees to work for common goal
• Human resources department should engage in careful communication
of what the firm hopes to achieve by switching to EVA, the manner in
which employees and management may improve EVA, and the way in
which employees compensation is tied to EVA.
Market Value Added (MVA)
33
• The formula for MVA is: MVA = V- K
• where:
• MVA is market value added
• V is the market value of the firm, including the
value of the firm's equity and debt
• K is the capital invested in the firm
34
• MVA is the present value of a series of EVA
values. MVA is economically equivalent to the
traditional NPV measure of worth for evaluating
an after-tax cash flow profile of a project if the
cost of capital is used for discounting.
35
Thanks