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This is to certify that the project report titled, “EC

CESS” has been completed by
Ms. Sowmya.K bearing registration number 03XQCM6098, under the guidance of
Dr. Nagesh. S. Malavallllii, Principal,, M.P.Birla Institute of Management, Associate
Bharatiya Vidya Bhavan, Bangalore.

Place: Bangalore Dr. NAGESH.S.MALAVALLI

Date: (Principal)

This is to certify that the project report titled, “ECONOMIC

completed under my guidance and supervision.

It is submitted in partial fulfillment of the requirement for

University by Ms
Ms.. SOW
OWMMYA.K and has not been submitted to any other
University or Institute for award of any Degree or Diploma.

Place: Bangalore

I hereby declare that the dissertation report titled “ECONOMIC

submitted in partial fulfillment of the requirements for the Master of
Business Administration Degree of Bangalore University is an original
and bonafide work.

I also declare that this report has not been submitted to any other
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PLACE: (Sowmya.K)
(Reg. No. 03XQCM6098)

The completion of the project would have been impossible without the
valuable contributions of people from the academics, family and friends.

I hereby wish to express my sincere gratitude to all those who

supported me throughout the study.

I am thankful to Dr. NAGESH MALAVALLI, Principal, M.P.Birla

Institute of Management, Bangalore, for his valuable guidance, academic and
moral support which made this report a reality.

I am also thankful to Prof. T.V.Narasimha Rao (Finance) and Prof.

S.Santhanam (Statistics) for their support in completion of this report.

I also thank my family members and friends whose support and

encourage has meant a lot to me personally and also for the completion of the


Market prices of the shares reflect the performance of the company. Today,
wealth created by the company is more important than the profit it earns or the
dividend it pays to the shareholders. The objective of this research is to study the
relationship that exists between the wealth/value for the shareholders created by the
company and market prices of the shares. Basic thrust of the study is to establish the
supremacy of EVA as a measure of performance over traditional measures.

The hypothesis of the study is that, there is significant relationship

between EVA and share prices and of the 4 chosen performance metrics,
EVA is the most significant measure, which is better reflected in the market
prices of the shares as compared to other traditional measures of
performance. This is tested on 24 companies of the Sensex for a period of 10
years beginning from FY 94-95 to FY 2003-04. Analysis is done using the
Regression tool.

From the analysis, it is found that EVA has no significant relationship

with the Market prices and also is not a major influencing factor among the
performance metrics. EPS is the strong measure reflected in the share prices
of the companies.


1.1 Introduction 2
1.2 Background of the study 3
1.3 Purpose of the study 3
1.4 Problem statement 3
1.5 Objectives of the study 4
1.6 Research Questions 4
1.7 Theoretical Framework 5-13


4.1 Study Type 19
4.2 Population of the study 19
4.3 Sample Frame 19
4.4 Sampling Technique 19
4.5 Sampling Profile 20
4.6 Data Gathering Procedure 21
4.7 Hypothesis of the study 21
4.8 Testing of hypothesis 22
4.9 Description of tools used 23
4.10 Limitations of the study 26



6 44-46
6.1 Discussions

6.2 Conclusions 46

List of Tables

Table No. PARTICULARS Page No.

Market price, NPR, RONW, EPS and EVA for
1 the 24 companies for the year 2003-2004. 28

Market price, NPR, RONW, EPS and EVA for

2 the 24 companies for the year 2002-2003 29

Market price, NPR, RONW, EPS and EVA for

3 the 24 companies for the year 2001-2003. 30

Market price, NPR, RONW, EPS and EVA for

4 the 24 companies for the year 2000-2001. 31

Market price, NPR, RONW, EPS and EVA for

5 the 24 companies for the year 1999-2000. 32

Market price, NPR, RONW, EPS and EVA for

6 the 24 companies for the year 1998-1999. 33

Market price, NPR, RONW, EPS and EVA for

7 the 24 companies for the year 1997-1998. 34

Market price, NPR, RONW, EPS and EVA for

8 the 24 companies for the year 1996-1997. 35

Market price, NPR, RONW, EPS and EVA for

9 the 24 companies for the year 1995-1996. 36

Market price, NPR, RONW, EPS and EVA for

10 37
the 24 companies for the year 1994-1995.
Co-efficient of regression, t statistic, Adjusted R2 and

11 F values from the year 1994-2004 for Model 1 38

Co-efficient of regression, t statistic, Adjusted R2 and

12 F values from the year 1994-2004 for Model 2 40

Co-efficient of regression, t statistic, Adjusted R2 and

13 F values from the year 1994-2004 for Model 3 42
Creation of shareholder’s value is the core of every business. This is
natural since shareholders own the company and as rational investors they
expect good long-term yield on their investment. Commonly used accounting
measures are EPS (Earnings per Share), ROI (Return on Investment), NPR
(Net Profit Ratio) etc. But these metrics may not show a clear picture with
respect to the value created by the company.

Therefore, value based metrics of performance evaluation like EVA

(Economic Value Added), MVA (Market Value Added), CVA (Cash Value
Added) and CFROI (Cash Flow Return on Investment) have come into
existence. These new performance metrics seek to measure the periodic
performance in terms of change in value. Maximizing value means
maximizing long-term yield on shareholders’ investment.

The consulting firm of Stern Stewart published The Real Key to

Creating Wealth (John Wiley & Sons, New York, 1998), which "celebrates a
revolution in management known as economic value added (EVA)." Stern
Stewart claims that:

EVA is the only true indicator of business and management performance;

EVA is "today's hottest financial idea and getting hotter";

EVA "allows all financial decisions to be modeled, monitored, evaluated,

communicated, and compensated in terms of a single measure";

"EVA is the only reliable and unambiguous continuous-improvement metric"

EVA must be used to guide every decision;

EVA should be used as the "deciding factor in all business decisions."

In India, a few companies like Infosys publish EVA in its annual report
and TISCO uses EVA to measure the performance of its segments.
Background of the study
Investors are currently demanding Shareholder value more strongly
than ever. So the value created by the company is more linked to the market
price of the shares. This study is undertaken to show the relationship that
exists between the various performance metrics and the share prices as the
performance of the company is reflected in the share prices in the market.

Purpose of the study

The purpose of the study is to show that EVA has relationship with
share prices and this relationship is significant. This shows that value addition
by the company is also a dependant factor for the movement in the share

So this study is helpful to the investors for their investment decision as

the study also allows them to easily identify companies that pursue business
strategies with the goal of shareholders value creation.

Problem Statement

There are various views with respect to whether traditional measures

or value-based measures influence the share prices. Considering this, it is
interesting to examine which of the performance measures has more
influence on the share prices.

Question to be addressed is whether there is relationship

between EVA and share prices and whether this relationship is
Objectives of the study
To measure EVA for sample companies.
To analyse the relationship between EVA and share prices.
To find out which of the performance metrics is better reflected in the
share prices.
To establish that EVA is a better measure of performance.

Research Questions

The following are the research questions that are addressed in the study:

1. Is there any relationship between EVA and Share prices?

2. Is EVA a strong influencing factor on the share prices as compared to
Theoretical framework
Investors analyze and interpret the financial statements so that they
can get an insight into the firm’s performance. Ratio analysis is one of the
tools of financial analysis. It shows the relationship between two figures in the
financial statements. There are various types of ratios used. Investors of more
interested in profitability ratios like Net profit ratio, Return on Capital
employed, Return on Equity, etc., and valuation ratios like Price-Earnings
ratio, Earnings per share, Yield, etc.

Net profit ratio

NPR shows the earnings left for the shareholders as a percentage of
net sales. It measures the overall efficiency of production, administration,
selling, financing, pricing and provides a valuable understanding of the cost-
profit structure of the company. It enables the analysts to identify the sources
of business efficiency/inefficiency.

NPR= Net Profit * 100

Net Sales

Return on Net worth/Equity

RONW measures the profitability for the shareholders funds invested in
the firm. It is an important measure as it reflects the productivity of the
ownership capital in the firm. This measure is of great interest to the

RONW= Earnings for Equity shareholders * 100

Average equity capital
Earnings per share
EPS is also a measure of the profitability of the firm. It indicates the
profitability on a per-share basis.

EPS = Earnings for Equity shareholders * 100

No. of equity shares

Economic Value Added

The consulting firm Stern Stewart originally proposed it. It is the most popular

value-based measure. It is the surplus left after making an appropriate charge for the

capital employed in the business.

EVA = NOPAT – WACC (Capital Invested)

NOPAT is Net Operating Profit After Taxes

WACC is Weighted Average Cost of Capital

Market Value Added

MVA is the difference between the company’s market value and the capital

invested. It is the premium the market awards a company over and above the amount

the investors have invested in it. This helps in the assessment of how the markets view

EVA generating ability of the firm. So, MVA is the market expectations of future

EVAs generated by a firm.

MVA= EVA1 + EVA2 +………………………

(1+WACC)1 (1+WACC)2
Cash Flow Return on Investment

The CFROI model avoids the use of accounting book capital in valuing the

firm’s existing assets and thus provides an accurate estimate in determining

shareholder value.

CFROI = Cash flow - Economic depreciation

Cash Invested

Economic depreciation is the amount of annual sinking fund payment earning the cost

of capital required to replace the assets.

Cash Value Added

CVA is based on cash flows and not on earnings. It is the spread
between CFROI and the real cost of capital, multiplied with the investment in
fixed assets and working capital.

CVA= Cash flows- Economic Depreciation-(Cash invested* WACC)

Background of Economic Value Added
EVA is not a new discovery. An accounting performance measure
called residual income is defined to be operating profit subtracted with capital
charge. EVA is thus one variation of residual income with adjustments to how
one calculates income and capital. According to Wallace (1997, p.1) one of
the earliest to mention the residual income concept was Alfred Marshall in
1890. Marshall defined economic profit as total net gains less the interest on
invested capital at the current rate. According to Dodd & Chen (1996, p.27)
the idea of residual income appeared first in accounting theory literature early
in this century by e.g. Church in 1917 and by Scovell in 1924 and appeared in
management accounting literature in the 1960s. Also Finnish academics and
financial press discussed the concept as early as in the 1970s. It was defined
as a good way to complement ROI-control (Virtanen 1975, p.111). Knowing
this background many academics have been wondering about the big
publicity and praise that has surrounded EVA in the recent years. The EVA-
concept is often called Economic Profit (EP) in order to avoid problems
caused by the trademarking. On the other hand the name "EVA" is so popular
and well known that often all residual income concepts are often called EVA
although they do not include even the main elements defined by Stern
Stewart & Co. For example, hardly any of those Finnish companies that have
adopted EVA calculate rate of return based on the beginning capital as
Stewart has defined it, because average capital is in practice a better estimate
of the capital employed. So they do not actually use EVA but other residual
income measure. This insignificance detail is ignored later on in order to avoid
more serious misconceptions. It is justified to say that the EVA concept
Finnish companies are using corresponds virtually the EVA defined by Stern
Stewart & Co.
In the 1970s or earlier residual income did not got wide publicity and it
did not end up to be the prime performance measure in great deal of
companies. However EVA, practically the same concept with a different
name, has done it in the recent years. Furthermore the spreading of EVA and
other residual income measures does not look to be on a weakening trend.
On the contrary the number of companies adopting EVA is increasing rapidly
(Nuelle 1996, p.39, Wallace 1997, p.24 and Economist 1997/2). We can only
guess why residual income did never gain a popularity of this scale. One of
the possible reasons is that Economic value added (EVA) was marketed with
a concept of Market value added (MVA) and it did offer a theoretically sound
link to market valuations. In the times when investors demand focus on
Shareholder value issues this was a good bite. Perhaps also pertinent
marketing by Stern Stewart & Co. had and has its contribution.

EVA is one measure that is used to monitor the overall value creation in
a business. It is a value based framework that provides unique insight into the
value creation. The idea behind EVA is that shareholders must earn a return
that compensates the risk taken. In other words equity capital has to earn at
least same return as similarly risky investments at equity markets. If that is not
the case, then there is no real profit made and actually the company operates
at a loss from the viewpoint of shareholders. On the other hand if EVA is zero,
this should be treated as a sufficient achievement because the shareholders
have earned a return that compensates the risk. This approach - using average
risk-adjusted market return as a minimum requirement - is justified since that
average return is easily obtained from diversified long-term investments on
stock markets. Average long-term stock market return reflects the average
return that the public companies generate from their operations.
What is EVA and how it is calculated?

EVA is the difference between the company’s net operating profits after
taxes and the cost of capital employed in generating those profits in one
financial year. If EVA is positive, the company creates shareholder wealth. If
EVA is negative, the shareholder wealth is destroyed.

The concept of EVA is based on the principle of residual income, which

states that the real income generated by a company is the residue that remains
after a company’s shareholders and debtors have been paid their annual
required return.

The technique of EVA has acquired acceptance as a tool for assessing

the existing financial status and predicting the future performance of the
company. The most important reason to adopt EVA as the main corporate
financial goal is that it is directly correlated to the intrinsic market value.
Maximising EVA consistently would lead to mazimisation of the market

EVA has two distinct applications

To measure how much shareholder value the firm has created in the
past and to determine investor expectations as they relate to the stock price .

A firm/s present value should equal its invested capital plus the
present value of future EVA.

Basically EVA examines the three fundamental principles of value

creation: Cash flow, Risk, and Sustainability of Returns.
Uses of EVA

In stock selection the EVA tool can be used in four distinct ways.

1. Analyzing historical trends - EVA can measure a company’s historical

success in creating shareholder wealth.
2. Using EVA to forecast a target stock price - EVA can be used to
determine whether a stock is fairly valued based on a forecast of
economic profits. Such a forecast converts discounted EVA into a
share price.
3. To quantify Competitive Advantage Period (CAP) - Stock prices in
many cases may reflect a long competitive advantage period. Analysts
can use the value driver model to look at their assumptions regarding
risk and CAP.
4. To examine excess returns and its impact on valuation of a stock -
Another way of exploring the explanatory power of the value drivers in
an EVA model is to perform a regression analysis of invested capital
(ROIC) minus the weighted average cost of capital (WACC) spread as
the independent variable and enterprise value to invest capital as the
dependant variable. The correlation between return spreads and
valuation is quite strong.

Superiority of EVA can be known from the following comparisons

Conceptually, EVA is superior to accounting profits as a measure of

value creation because it recognizes the cost of capital and, hence, the
riskiness of a firm’s operations. Furthermore EVA is constructed so that
maximizing it can be set as a target. Traditional measures do not work that
way. Maximizing any accounting profit or accounting rate of return leads to an
undesired outcome.
• EVA vs. ROCE

1. Return on capital is very common and relatively good performance

measure. Different companies calculate this return with different formulas
and call it also with different names like Return on investment (ROI),
Return on invested capital (ROIC), Return on capital employed (ROCE),
Return on net assets (RONA), Return on assets (ROA) etc. The main
shortcoming with all this rate of return is that maximizing rate of return
does not necessarily maximize the return to shareholders.
2. Also operations should not be guided with the goal to maximize the
rate of return. As a relative measure and without the risk component ROI
fails to steer operations correctly. Therefore capital can be misallocated on
the basis of ROI. First of all ROI ignores the definite requirement that the
rate of return should be at least as high as the cost of capital. Secondly
ROI does not recognize that shareholders’ wealth is not maximized when
the rate of return is maximized. Shareholders want the firm to maximize
the absolute return above the cost of capital and not to maximize
percentages. Companies should not ignore projects yielding more than the
cost of capital just because the return happens to be less than their current
return. Cost of capital is much more important hurdle rate than the
company's cu
rrent rate of return.
3. Observing rate of return and making decisions based on it alone is
similar to assessing products on the "gross margin on sales" -percentage.
The product with the biggest "gross margin on sales" -percentage is not
necessary the most profitable product. The product profitability depends
also on the product volume. In the same way bare high rate of return
should not be used as a measure of a company's performance. Also the
magnitude of operations i.e. the amount of capital that produces that return
is important. High return is a lot easier to achieve with tiny amount of
capital than with large amount of capital. Almost any highly profitable
company can increase its rate of return if it decreases its size or overlooks
some good projects, which produce a return under the current rate of
• EVA vs. ROE

ROE suffers from the same shortcomings as ROI. Risk component is not
included and hence there is no comparison. The level of ROE does not
tell the owners if company is creating shareholders wealth or destroying
it. With ROE this shortcoming is however much more severe than with
ROI, because simply increasing leverage can increase ROE. As we all
know, decreasing solvency does not always make shareholders’ position
better because of the increased (financial) risk. As ROI , return on equity
(ROE) is also an informative measure but it should not guide the

• EVA vs. EPS

EPS is raised simply by investing more capital in business. If the

additional capital is equity (cash flow) then the EPS will rise if the rate of
return of the invested capital is just positive. If the additional capital is
debt then the EPS will rise if the rate of return of the invested capital is
just above the cost of debt. In reality the invested capital is a mix of debt
and equity and the EPS will rise if the rate of return of that additional
capital invested is somewhere between cost of debt and zero. Therefore
EPS is completely inappropriate measure of corporate performance and
still it is very common yardstick and even a common bonus base. EPS
and earnings can be increased simply by pouring more money into
business even though the return on that money would be entirely
unacceptable from the viewpoint of owners. EPS, earnings and
earnings/EPS growth should therefore be abandoned as performance
Review of literature
The share prices in the market can be measured by the MVA-Market value added
for the company which is the total market value of the company. This relationship
between EVA and MVA has been studied in the recent years in many studies with
many methods - and with different results.

Stewart (1990, p.215 - 218) has first studied this relationship with
market data of 618 U.S. companies. Stewart presents the results in his book
"The quest for value". He states that EVA and MVA correspond each other in
reality quite well among US companies (the data was from late 1980’s).
Market value will always reflect the value of assets even though the company
has very low or negative rate of return (and so theoretically it should sell a lot
below book value). On the other hand markets do not believe that the weak
returns can go on forever. Markets are expecting a chance, an improvement,
in the long run. If EVA is positive, the relationship is more direct. Then the
market valuation happens on the basis of return and growth potential and not
on the basis of liquidation or recovery value. Stewart finds also that MVA and
EVA correspond each other best when we talk about changes in EVA and
MVA and not the absolute levels. Changes in EVA and MVA are not affected
so much by accounting distortions and inflation than the absolute values.

Lehn and Makhija (1996) study EVA and MVA as performance

measures and signals for strategic change. Their data consists of 241 U.S.
companies and cover years 1987, 1988, 1992 and 1993. The researchers first
find out that both measures correlate positively with stock returns and that the
correlation is slightly better than with traditional performance measures like
return on assets (ROA), return on equity (ROE) and return on sales (ROS).
Lehn and Makhija conclude that their results suggest EVA and MVA to be
effective performance measures that contain information about the quality of
strategic decisions and serve as signals of strategic change.
Uyemura, Kantor and Pettit (1996) from Stern Stewart & Co present
findings on the relationship between EVA and MVA with 100 bank holding
companies. They calculate regressions to 5 performance measures including
EPS, Net Income, ROE, ROA and EVA. According to their study the
correlations between these performance measures and MVA are: EVA 40%,
ROA 13%, ROE 10%, Net income 8% and EPS 6%. The data is from the ten-
year period 1986 through 1995.

O’Byrne (1996) from Stern Stewart & Co uses capitalized EVA as

independent variable in a regression where market value divided by capital is
the dependent variable. He finds that the level of EVA explains 31% of the
variance in market value, whereas the level of net operating profit after taxes
explains only 17%. When looking at changes in EVA and market value
O’Byrne finds that changes in EVA explain 55% of variations in changes in
market value. Changes in NOPAT explain only 33%.

Dodd and Chen (1996) study the correlation between stock returns and
different profitability measures including EVA, non-adjusted residual income,
ROA, EPS and ROE. In their study ROA explained stock returns best with R
squared of 24,5%. The R squared for other metrics are: EVA 20,2%, residual
income 19,4% and EPS, ROE approximately 5-7%. The writers concluded
that firms adopting EVA might as adopt simple residual income concept, while
residual income correlates with share prices almost as well as its adjusted
version called EVA. The study is based on 566 U.S. companies from 1983-
In India, the concept of EVA is gaining popularity. Research titled
Economic Value Added - A General Perspective by Asish K Bhattacharyya
& B.V.Phani examines whether EVA is a superior performance measure both
for corporate reporting and for internal governance. It relied on empirical
studies in U.S.A. and other advance economies. It concluded that though EVA
does not provide additional information to investors, it can be adapted as a
corporate philosophy for motivating and educating employees to differentiate
between value creating and value destructing activities. This would lead to
direct all efforts in creating shareholder value. The paper brings to attention
the dangerous trend of reporting EVA casually that might mislead investors.

Study type
The study type is analytical, quantitative and
Analytical as facts and existing information is used for the analysis.
Quantitative as EVA is calculated and the variables are expressed in
measurable terms.
Historical as the historical information is used for analysis and interpretation.

Study population
Population includes all the domestic and foreign companies.

Sampling frame
Sampling frame includes all those companies that are listed in the stock

Sampling technique
Non-probabilistic sampling is used because only particular units are selected
from the sampling frame. Such a selection is undertaken as these units
represent the population in a better way. The companies listed in the stock
exchange are considered since the market prices can be obtained. The
companies in the Sensex are chosen because it is an ideal index and it is a
good proxy for the whole market. Also it is a barometer that indicates the state
and health of the economy.
Sample Profile
Sample includes 24 companies in the BSE Sensex (for which relevant data
was available), for a period of 10 years starting from FY 94-95 to FY 2003-04.
The following are the sample 24 companies:
1. Associated Cement Companies Ltd.
2. Bajaj Auto
3. Bharat Heavy Electricals Ltd.
4. Cipla Ltd.
5. Dr. Reddy’s Laboratories Ltd.
6. Grasim Industries Ltd.
7. Gujarat Ambuja Cements Ltd.
8. Hero Honda Motors
9. Hindalco
10. Hindustan Lever Ltd.
11. Hindustan Petroleum Corporation Ltd.
12. Housing Development Finance Co,
13. ITC Ltd.
14. Infosys Technologies Ltd.
15. Larsen & Tourbro Ltd.
16. Ranbaxy Laboratories Ltd.
17. Reliance Industries
18. Reliance Energy
19. Satyam Computers
20. Tata Iron and Steel Co. Ltd.
21. Tata Motors
22. Tata Power
23. Wipro Ltd.
24. Zee Telefilms
Data gathering procedure and instrumentation

Data type: Secondary data

Historical share prices of the sample companies.
Index values of BSE Sensex

Financial Information of the sample companies.

Data Source: Historical share prices of the sample companies and the index
points for the period has been taken from the database of Capital Market
Publishers (India) Ltd., Capitaline 2000. Financial statements of the sample
companies have also been taken from the same source.

Hypothesis of the study

Hypothesis 1
H0: There is no significant relationship between EVA and Share prices.
H1: There is significant relationship between EVA and Share prices.

Hypothesis 2
H0: EVA is not a strong factor influencing the share prices as compared to


H1: EVA is a strong factor influencing the share prices as compared to

Testing of Hypothesis

The first hypothesis is tested using linear regression tool, simple co-efficient of
correlation, co-efficient of determination, t statistic and F statistic.

Co-efficient of correlation is used to describe how well one variable is

explained by the other variable. It reveals the magnitude and direction of
relationship. The magnitude is the degree to which variables move in the
same or opposite direction. The co-efficient’s sign signifies the direction of the
Co-efficient of determination measures the extent, or strength of the
association that exists between the two variables.
t-statistic is used for testing the significance of an individual
explanatory variable. If the t statistic is greater than 2 @ 5 % level of
significance, the relationship is considered significant.
Regression is the process of predicting one variable from another by statistical means using previous data.

F statistic is used to test the significance of the regression as a whole.

If the Fcal < Ftab, then the null hypothesis is accepted.

The second hypothesis is tested using multiple regression tool, multiple co-
efficient of correlation, co-efficient of determination, t statistic and F statistic.

Multiple regression is a statistical process by which several

independent variables are used to predict one dependant variable.

Multiple co-efficient of correlation is used to describe how well one variable is

explained by many independent variables. It reveals the magnitude of influence of
the variables on the dependant variables.
Description about the analysis tools used

Simple Regression

Y is the dependant variable – market price of shares
a is the constant
x is the independent variable EVA
b is the coefficient of the independent variable

Multiple Regression

Y=a+b1x1+b2x2+b3x3 +b4x4

Y is the dependant variable – market price of shares
a is the constant
xi are the independent variables – performance metrics like NPR, RONW,
bi are the coefficient of the independent variables
Method adopted to calculate EVA is as follows

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1. NOPAT is net operating profit after taxes.
2. WACC is weighted average cost of capital (equity and debt)
It is calculated as follows:
WACC = Kd (1-T)*W 1+Ke *W 2
W1 is weight of debt
W2 is weight of equity

Kd is the effective cost of Debt, which is calculated by dividing the totat

interest by the total debt.
Ke is calculated using the Capital Asset Pricing Model developed by
Modigliani and Miller.
Ke=Rf+Beta (Rm-Rf)
Rf is the risk free rate, i.e., the rate of interest for 1-year government
securities. These rates are obtained from the website of Reserve Bank
of India.
Rm is the return for the market. It is calculated by using the formula
given below for the index values.
Rm=Average of return on market for all the 10 years
Return = Closing index value-opening index value * 100
Opening index value
Beta values for all the sample companies for all the 10 years are
calculated by finding the slope between log normal of share prices of
all the companies and log normal of the index values.
Log normal of the values is considered to remove abnormalities if any
and convert them into normal distribution.

3. Invested Capital is the total long term funds and includes equity
shares and the total debt as at the end of the year.

A firm’s invested capital multiplied by WACC gives the minimum level

of operating profits the firm should generate to satisfy stakeholders. EVA
measures how much net operating profit (adjusted for taxes) or NOPAT
exceed the capital charge (WACC * Invested capital). EVA correlates
extremely well with the market values.

While analyzing the EVA performance of a company, we look at ROIC-

WACC spread achieved by the company every year. The higher the spread,
the highest the Enterprise Value/Invested Capital multiple the company is
likely to enjoy.

Issues relating to calculation of EVA

WACC used in the calculations is at book value of equity and debt.

There are no consistent definitions of NOPAT or capital employed.

Different values of capital and NOPAT can be arrived by interpreting

them differently.
EVA can be manipulated by capitalizing the items appearing in the

profit and loss account. Any item capitalized and carried forward to the
balance sheet instead of being shown as an expense in the profit &
loss account will increase the net operating income. At the same time
inclusion of the item in the balance sheet will also increase the capital
employed. However, the increase in the capital charges as a result is
always much less than the increase in the net operating income as it is
factored by cost of capital. Thus accounting ambiguities can be used in
increasing the EVA.
Under the operating approach of capital employed calculation, different

depreciation policies (SLM and WDV here) will yield two different
values. In the calculations above the effect of changing the
depreciation policy on capital employed is shown.
As EVA does not measure cash flows and uses accounting measures

like accrued net income, it is prone to manipulations.

Managers could stop doing long-term planning and only work on the

short run if they are paid on the basis of EVA.

EVA requires research and development expenditures to be

capitalized. Managers could capitalize (record expenditures as assets

rather than expenses or losses) expenditures that have no future value
to manipulate EVA.
Changes in inventory valuation policy (e.g., FIFO to LIFO) or in

accounting for deferred taxation can have a significant impact on

operating profit and capital employed, which affects EVA.
EVA allows managers to hold back expenditures in suspension (asset)

accounts. Managers could therefore record as assets, expenditures

that will provide no expected future benefit.
EVA does not really measure value creation in terms of effectiveness

with which the resources deployed are utilized.

EVA cannot be used as a measure for divisional performance

appraisal. Different divisions (businesses) will have different levels of

risks and therefore should have different cost of capital. The
companies, though, use a standard cost of capital. Also, if somehow a
divisional measure is used it will inculcate a bias among divisional
managers who may be unwilling to invest in the required physical asset
creation to sustain corporate growth.
EVA by definition is biased against companies, which are capital

intensive. Hence, capital-intensive industries will always have a low

EVA compared to a FMCG companies. This measure is also biased
towards companies and industries that are in the matured stage of
business cycle and do not require asset creation.

Limitations of the study

o The Study is limited to the 24 companies that are included in BSE-

o Availability of dressed data with respect to the financial statements of
the companies
Data Analysis

The performance measures are based on the returns generated by the

business. Therefore, to obtain a meaningful conclusion, the performance of
different companies is compared cross-sectionally over the study period.
The following tables indicate the descriptive statistics with respect to
Market prices and the performance measures considered for the study-Net
Profit Ratio, Return on Networth, Earnings per share and Economic value

Table No. 1
Market price, NPR, RONW, EPS and EVA for the 24 companies for the year

Associated cement
202.9 5.15 16.48 10.78 133.0363
companies ltd
Bajaj auto 809.975 13.43 21.1 69.09 532.4924
Bhel 425.925 8.88 15.58 26.11 347.6986
Cipla ltd. 192.47 15.53 26.51 49.22 245.8825
Dr.Reddy's laboratories ltd. 1137.13 16.27 14.7 36.37 182.2263
Grasim industries ltd. 778.2 12.71 23.7 83.21 112.8462
Gujarat ambuja cements ltd. 270.78 14.61 18.51 17.75 221.691
Herohonda motors 490.2 27.67 26.46 32.81 1008.065
Hindalco industries 360.525 11.16 65.11 33.91 659.0971
Hindustan Lever ltd. 1014.13 12.78 12.86 88.6 505.744
Hindustan Petroleum Corp.
160.9 15.99 61.14 6.35 1642.06
Housing Development
400.68 3.29 26.4 53.36 1485.427
Finance co
I T C ltd 1104.68 27.76 44.83 68.82 1021.574
Infosys technologies ltd 901.625 13.48 27.34 61.75 1265.878
Larsen & Loubro ltd. 395.55 5.38 16.99 40.77 401.1886
Ranbaxy laboratories ltd. 1073.675 21.42 37.91 40.66 539.836
Reliance energy 432.05 9.17 17.39 36.31 3257.88
Reliance industries 511.3 10.46 10.61 20.43 45.79024
Satyam computers 260.48 21.87 23.57 17.06 359.9342
Tata Iron and Steel co. Ltd. 490.025 5.34 26.2 21.93 631.3833
Tata motors 268.075 12.38 10.78 25.72 258.0984
Tata power 187.185 14.65 45.36 46.02 1526.184
Wipro ltd. 436.78 17.63 26.76 35.59 662.4929
Zee telefilms 117.15 21.41 3.86 2.66 -5.90491
Table No. 2
Market price, NPR, RONW, EPS and EVA for 24 companies for the year

Associated cement companies ltd 148.95 2.09 6.67 5.75 39.18706

Bajaj auto 458.05 11.28 17.63 51.42 347.1624

Bhel 184.48 6.92 11.45 17.65 193.4523

Cipla ltd. 170.79 15.99 25.55 40.03 190.4426

Dr.Reddy's laboratories ltd. 908.93 24.53 24.02 50.6 288.9769

Grasim industries ltd. 318.15 9.22 17.57 38.82 373.5762

Gujarat ambuja cements ltd. 179.55 10.97 13.79 13.4 146.8731

Herohonda motors 336.36 23.2 24.02 26.83 903.7652

Hindalco industries 279.25 11.38 75.09 26.78 530.2646

Hindustan Lever ltd. 620.43 12.31 12.08 61.23 297.1086

Hindustan Petroleum Corp. ltd 207.65 16.19 52.82 8.04 1549.177

Housing Development Finance co 247.35 2.82 24.45 43.06 1153.495

I T C ltd 1018.39 26.12 40.68 170.01 775.7628

Infosys technologies ltd 651.78 12.44 28.41 53.48 1058.922

Larsen & Loubro ltd. 185.3 4.36 12.67 16.45 267.392

Ranbaxy laboratories ltd. 515.23 20.65 35.88 32.34 -1507.4

Reliance energy 262.3 8.19 15.58 28.62 2445.064

Reliance industries 214.23 4.18 6.19 11.21 18.51805

Satyam computers 233.9 20.64 20.55 9.49 159.9132

Tata Iron and Steel co. Ltd. 144.6 2.84 11.86 8.87 246.1611

Tata motors 114.03 12.46 11.98 26.27 314.2687

Tata power 82.83 11.99 35.41 26.48 882.2611

Wipro ltd. 494.88 20.13 27.74 34.84 607.4649

Zee telefilms 124.55 19.76 2.38 2.23 -144.53

Table No. 3
Market price, NPR, RONW, EPS and EVA for the sample companies for the
year 2001-2002.

Company Name Price NPR RONW EPS EVA
Associated cement companies ltd 137.98 4.59 13.77 7.63 72.81514
Bajaj auto 355.88 10.58 15.94 51.5 363.4351
Bhel 150.63 7.94 14.28 19.12 238.4659
Cipla ltd. 211.07 16.97 29.51 39.2 187.8532
Dr.Reddy's laboratories ltd. 729.09 29.36 45.71 59.56 170.2494
Grasim industries ltd. 291.9 7.96 13.95 33.05 339.4159
Gujarat ambuja cements ltd. 193.73 11.79 11.92 12.02 120.0262
Herohonda motors 317.02 21.48 22.86 47.66 736.014
Hindalco industries 256.65 10.37 70.41 22.67 425.0116
Hindustan Lever ltd. 709.75 25.98 15.31 92.13 386.9769
Hindustan Petroleum Corp. ltd 208.33 13.96 59.35 7.19 1474.825
Housing Development Finance co 211 1.77 12.73 23.26 555.5485
I T C ltd 912.97 26.44 38.78 142.76 686.5728
Infosys technologies ltd 728.03 12.09 30.43 48.48 937.338
Larsen & Loubro ltd. 212.2 4.25 9.54 13.95 196.6521
Ranbaxy laboratories ltd. 358.28 10.24 13.73 21.74 -15.598
Reliance energy 305.18 7.14 17.63 30.78 2116.849
Reliance industries 193.3 10.5 10.75 20.24 134.2242
Satyam computers 220.85 25.95 32.76 14.24 179.4928
Tata Iron and Steel co. Ltd. 102.73 -0.1 -0.29 0 15.81908
Tata motors 122.03 8.53 8.02 25.68 357.9784
Tata power 68.2 4.59 8.47 5.51 93.91668
Wipro ltd. 459.22 24.91 39.29 37.26 715.3063
Zee telefilms 124.275 23.93 2.41 2.36 -126.336
Table No. 4
Market price, NPR, RONW, EPS and EVA for the sample companies for the
year 2000-2001.

Company Name Price NPR RONW EPS EVA

Associated cement companies ltd 139.43 2.8 7.26 2.57 -8.05185

Bajaj auto 309.13 8.39 10.33 25.13 130.6638

Bhel 140.2 7.1 12.58 12.47 117.011

Cipla ltd. 186.06 17.09 28.01 29.4 144.7737

Dr.Reddy's laboratories ltd. 688.72 14.68 29.23 45.32 126.1042

Grasim industries ltd. 280.38 7.29 12.92 40.41 467.132

Gujarat ambuja cements ltd. 177.03 12.88 12.51 11.91 122.9055

Herohonda motors 252.81 19.88 21.2 38.17 606.6452

Hindalco industries 174.96 7.79 45.82 12.06 216.615

Hindustan Lever ltd. 793.28 26.47 16.58 89.83 413.7131

Hindustan Petroleum Corp. ltd 239.26 11.52 57.09 5.17 1188.133

Housing Development Finance co 148.95 2.24 17.75 31.09 856.6484

I T C ltd 1912.14 31.03 46.57 121.32 555.4118

Infosys technologies ltd 730 11.59 32.43 39.98 874.3234

Larsen & Loubro ltd. 232.43 3.42 6.88 12.01 109.0645

Ranbaxy laboratories ltd. 480.38 10.4 11.84 14.98 -8.22018

Reliance energy 363.43 11.49 23.05 24.63 1836.134

Reliance industries 245.18 14.03 13.14 22.34 193.3711

Satyam computers 545.88 26.43 55.46 17.17 429.8753

Tata Iron and Steel co. Ltd. 106.15 -6.31 -14.28 0 -654.301

Tata motors 108.68 10.23 12.19 19.69 262.1287

Tata power 80.24 10.44 17.7 14.46 340.841

Wipro ltd. 1202.27 21.31 52.94 28.6 562.6748

Zee telefilms 587.18 36 3.66 3.3 -68.2917

Table No. 5
Market price, NPR, RONW, EPS and EVA for the sample companies for the
year 1999-2000.

Company Name Price NPR RONW EPS EVA

Associated cement companies ltd 196.27 -2.72 -6.81 0 -89.5514

Bajaj auto 444.5 13.57 17.03 50.31 507.5519

Bhel 228.3 8.76 17.94 24 482.2678

Cipla ltd. 214.95 17.51 26.19 21.86 111.2881

Dr.Reddy's laboratories ltd. 608.69 12.23 14.73 22.36 52.08647

Grasim industries ltd. 312.35 4.68 8.68 24.55 388.3255

Gujarat ambuja cements ltd. 270.3 12.09 12 27.74 390.1593

Herohonda motors 162.33 19.94 19.76 31.64 527.6936

Hindalco industries 215.73 8.54 51.3 46.99 179.155

Hindustan Lever ltd. 768 26.75 17.36 80.96 442.6265

Hindustan Petroleum Corp. ltd 220.63 9.81 56.4 45.41 1011.834

Housing Development Finance co 165.87 3.12 19.57 30.04 881.9917

I T C ltd 1841.03 33.09 56.57 93.73 270.086

Infosys technologies ltd 861 9.96 32.33 30.64 715.9143

Larsen & Loubro ltd. 399.45 4.6 9.13 13.03 203.0263

Ranbaxy laboratories ltd. 452.07 12.02 13.58 16.16 34.02998

Reliance energy 240.68 15.17 23.37 22.04 1940.954

Reliance industries 255.75 13.78 13.72 21.02 256.5913

Satyam computers 755.87 19.32 50.28 22.86 119.7979

Tata Iron and Steel co. Ltd. 218.7 -2.15 -4.98 2.23 -39.4298

Tata motors 80.68 13.84 10.93 20.08 214.3706

Tata power 81.76 6.13 9.86 11.02 321.0664

Wipro ltd. 1744.22 12.38 55.1 10.68 178.2421

Zee telefilms 824 -28.46 -4.35 1.92 -19.592

Table No. 6
Market price, NPR, RONW, EPS and EVA for the sample companies for the
year 1998-1999.

Company Name Price NPR RONW EPS EVA
Associated cement companies ltd 105.92 2.48 6.41 39.89 -7.21773
Bajaj auto 584 15.33 22.43 44.39 421.9145

Bhel 311.65 7.78 19.13 21.98 403.3937

Cipla ltd. 72.45 18.63 28.58 56.68 95.47326

Dr.Reddy'slaboratories ltd. 316.52 12.15 14.28 19.24 31.03858

Grasim industries ltd. 247.4 3.79 6.67 21.8 341.0637
Gujarat ambuja cements ltd. 138.36 12.04 13.83 18.21 86.70598
Herohonda motors 138.92 19.05 17.81 270.98 430.291

Hindalco industries 121.73 8.18 47.82 29.7 109.2984

Hindustan Lever ltd. 621.63 28.27 18.9 75.46 353.5605
Hindustan Petroleum Corp. ltd 151.9 7.9 54.57 38.03 723.4881

Housing Development Finance co 216.7 3.77 19.32 38.74 717.4793

I T C ltd 272.01 33.27 41.7 43.87 99.2675
Infosys technologies ltd 790.88 8.23 32.29 24.8 580.8265

Larsen & Loubro ltd. 210 5.43 11.24 18.23 335.4946

Ranbaxy laboratories ltd. 183.42 10.88 11.61 12.82 3.901947

Reliance energy 152.2 16.04 18.3 17.56 973.6726

Reliance industries 177 14.78 13.52 18.5 169.8355
Satyam computers 75.77 19.25 54 27.68 63.45146

Tata Iron and Steel co. Ltd. 207.15 -0.15 -0.26 3.48 -89.7714
Tata motors 96.9 14.59 10.37 14 113.4555

Tata power 76.87 4.5 6.86 7.23 80.87423

Wipro ltd. 174.29 9.27 46.55 24.16 78.15441

Zee telefilms 70.13 27.03 36.48 32.04 51.32311

Table No. 7
Market price, NPR, RONW, EPS and EVA for the sample companies for the
year 1997-1998.

Company Name Price NPR RONW EPS EVA

Associated cement companies ltd 107.76 -0.01 -0.03 8.32 -44.7202

Bajaj auto 568.17 14.7 23.93 38.08 349.2606

Bhel 366.25 10.96 31.53 29.15 576.4844

Cipla ltd. 46.45 19.82 33.09 50.46 82.42989

Dr.Reddy's laboratories ltd. 161.55 16.63 17.19 18.14 29.13845

Grasim industries ltd. 327.93 5.74 10.36 31.24 360.5034

Gujarat ambuja cements ltd. 155.65 11.64 13.37 16.26 76.61533

Herohonda motors 186.41 20.31 17.11 235.75 362.7106

Hindalco industries 61.8 6.69 44.26 37.96 67.40918

Hindustan Lever ltd. 873.88 29.83 19.72 66.11 326.0711

Hindustan Petroleum Corp. ltd 118.25 6.72 47.17 26.44 493.2224

Housing Development Finance co 318.27 4.87 18.49 31.17 486.4995

I T C ltd 46.99 26.58 36.2 40.54 50.34894

Infosys technologies ltd 551.25 7.7 35.28 20.99 482.7273

Larsen & Loubro ltd. 230.68 7.62 13.45 20.73 358.6624

Ranbaxy laboratories ltd. 201.49 13.82 15.69 33.76 86.32379

Reliance energy 175.89 17 18.78 16.94 941.7349

Reliance industries 197.38 13.38 15.01 18.23 159.8229

Satyam computers 12.71 14.64 27.23 7.18 15.71561

Tata Iron and Steel co. Ltd. 344 4.11 7.96 10.97 118.7025

Tata motors 124 13.9 11.11 13.92 108.0169

Tata power 109.36 6.21 9.95 8.36 111.3388

Wipro ltd. 30.81 7.38 37.83 18.54 56.05531

Zee telefilms 19.68 25.2 36.88 22.58 37.3622

Table No.8
Market price, NPR, RONW, EPS and EVA for the sample companies for the
year 1996-1997.

Company Name Price NPR RONW EPS EVA
Associated cement companies ltd 144.38 3.12 7.9 53.21 18.59599

Bajaj auto 806.62 13.95 27.81 54.35 349.6885

Bhel 230.63 7.96 26.45 18.72 428.4591
Cipla ltd. 182.4 15.66 30.54 35.04 45.37688
Dr.Reddy's laboratories ltd. 121.83 14.92 12.54 12.36 17.52562
Grasim industries ltd. 789.38 6.38 11.34 37.32 420.2828
Gujarat ambuja cements ltd. 155.86 14.37 15.35 17.22 87.15745
Herohonda motors 131.49 19.59 15.77 198.37 343.87
Hindalco industries 28.34 6.56 42.79 25.03 45.11348

Hindustan Lever ltd. 1010.6 29.7 18.51 52.05 248.3742

Hindustan Petroleum Corp. ltd 77.05 5.83 42.91 27.52 368.3527
Housing Development Finance co 368.91 4.39 20.37 28.96 469.1255
I T C ltd 17.35 23.43 42.24 37.24 32.04288
Infosys technologies ltd 344.75 5.89 29.66 13.74 336.6507
Larsen & Loubro ltd. 251.35 7.75 14.01 15.95 281.7096
Ranbaxy laboratories ltd. 188.3 14.39 16.19 30.67 92.35065
Reliance energy 122.91 20.53 15.86 28.85 749.4766

Reliance industries 208.13 11.72 13.73 14.79 114.238

Satyam computers 3.83 21.14 26.46 7.06 14.57517

Tata Iron and Steel co. Ltd. 426.88 7.7 25.15 29.01 605.5374
Tata motors 158.88 10.02 8.87 9.91 65.96369
Tata power 131.52 8.31 13.68 12.32 267.8789

Wipro ltd. 12.34 5.06 29.29 41.33 30.48168

Zee telefilms 12.58 32.39 34.27 15.08 24.84089
Table No.9
Market price, NPR, RONW, EPS and EVA for the sample companies for the
year 1995-1996.

Company Name Price NPR RONW EPS EVA

Associated cement companies ltd 170.07 9.72 29.49 267.9 159.6585

Bajaj auto 499.8 15.4 33.73 52.53 336.8847

Bhel 100 7.14 25.08 14.31 316.6089

Cipla ltd. 30 8.02 20.41 14.49 18.02364

Dr.Reddy's laboratories ltd. 137.7 22.77 18.65 18.94 33.76574

Grasim industries ltd. 588 10.37 18.71 45.89 447.0293

Gujarat ambuja cements ltd. 165.9 20.23 23.01 19.72 93.45376

Herohonda motors 128.5 19.92 16.52 161.36 231.962

Hindalco industries 23.06 4.17 30.55 13.19 22.74451

Hindustan Lever ltd. 660.68 28.17 23.44 80.8 268.1199

Hindustan Petroleum Corp. ltd 59 6.36 31.26 16.4 197.3089

Housing Development Finance co 220.11 4.33 23.12 24.85 368.8333

I T C ltd 9.35 26.77 38.69 50.94 16.28309

Infosys technologies ltd 251 5.1 28.5 10.64 241.8188

Larsen & Loubro ltd. 262.93 9.15 15.94 15.64 232.2199

Ranbaxy laboratories ltd. 193.22 15.31 18.57 30.43 94.2759

Reliance energy 114.88 22.79 16.6 27.87 783.5743

Reliance industries 148 11.54 14.95 12.54 84.44525

Satyam computers 4.35 26.13 32.81 6.09 10.93456

Tata Iron and Steel co. Ltd. 356.5 6.85 27.63 21.92 432.8217

Tata motors 127.5 19.34 19.57 20.46 172.5012

Tata power 133.44 10.94 19.92 15.41 333.0439

Wipro ltd. 11.43 4.13 27.37 31.26 35.98982

Zee telefilms 18.43 26.11 33.5 12.02 18.37406

Table No. 10
Market price, NPR, RONW, EPS and EVA for the sample companies for the
year 1994-1995.

Company Name Price NPR RONW EPS EVA
Associated cement companies ltd 215.35 6.99 28.72 180.13 105.8612

Bajaj auto 476 14.23 39.11 38.34 216.9741

Bhel 145 3.39 11.81 5.76 101.4728
Cipla ltd. 57.73 8.39 35.31 13.31 18.49161
Dr.Reddy's laboratories ltd. 227.14 20.25 26.4 16.23 14.74848
Grasim industries ltd. 687 12.87 22.95 42.68 307.6644
Gujarat ambuja cements ltd. 181.86 17.51 18.24 16.14 58.68381
Herohonda motors 94.04 18.73 21.26 144.35 178.9984
Hindalco industries 23.74 4.07 28.18 9.74 13.93679

Hindustan Lever ltd. 452.87 25.79 24.52 60.81 98.31661

Hindustan Petroleum Corp. ltd 68.25 5.87 34.49 13.01 147.3673
Housing Development Finance co 218.11 3.76 25.17 20.43 243.1875
I T C ltd 10.24 23.73 29.53 28.94 7.289069
Infosys technologies ltd 364.3 4.9 31.29 10.77 231.4942
Larsen & Loubro ltd. 253.7 8.51 15.71 12.12 74.33073
Ranbaxy laboratories ltd. 194.44 13.11 22.19 25.64 55.09909
Reliance energy 169.26 19.76 18.48 23.34 371.1108

Reliance industries 205 12.62 23.35 13.53 74.23838

Satyam computers 3.93 37.44 34.26 4.86 6.964318

Tata Iron and Steel co. Ltd. 330.69 5.69 28.27 23.29 273.3892
Tata motors 159.75 11.61 14.04 11.03 62.22149
Tata power 169.6 6.08 10.79 8.35 177.4811

Wipro ltd. 8.66 4.04 33.47 21.07 20.60014

Zee telefilms 30.25 44.1 39.24 10.88 13.98905
Cross-sectional Regression results

Model 1

Y is the Market Price
X is the EVA
a is the constant
b is the co-efficient

Table No. 11
Co-efficient of regression, t statistic, Adjusted R2 and F values from the year

Years a b Adjusted R2 F
96.183 0.096
2003-04 -0.044 0.036
(5.52) (0.19)
338.08 0.00107
2002-03 -0.045 0
(5.40) (0.01)
267.806 0.111
2001-02 0.017 1.409
(4.36) (1.19)
365.55 0.152
2000-01 -0.013 0.709
(3.35) (0.84)
549.473 -0.179
1999-2000 -0.016 0.628
(4.27) (0.79)
172.865 0.221
98-99 0.067 2.64
(3.42) (1.63)
134.273 0.371
97-98 0.146 4.944
(2.42) (2.22)*
130.807 0.511
96-97 0.123 4.215
(1.72) (2.05)*
90.062 0.455
95-96 0.188 6.339
(1.81) (2.52)*
85.07 0.941
94-95 0.327 12.167
(1.98) (3.49)*

Numbers within the brackets indicate t values = Correlation/Standard Error

* indicates t values greater than 2 @ 5% significance level.
We can see that there exists no relationship between market prices
and EVA, excepting for the years 94-98 where the t values are statistically
significant. This is surprising because though EVA is a new concept, the
relationship is reflected in the earlier years, but not in the recent past.

In the recent years the Fcal < Ftab, so the null hypothesis is accepted.
But for the years 94-98 the Fcal > Ftab, indicating that there is relationship.

The R2 values for the years 94-98 are 0.146, 0.123, 0.188 and 0.327
respectively. This indicates that the relationship is not very significant, and
also not consistent.

Therefore, we cannot infer any strong relationship between Market

prices and EVA.
Model 2

Y is Market price
X1 is NPR
X2 is RONW
X3 is EPS
a is the constant
bi are the co-efficients

Table No. 12
Co-efficient of regression, t statistic, Adjusted R2 and F values from the year

Years a b1 b2 b3 2 F
35.689 12.49 -2.196 9.403
2003-04 0.432 6.83
(0.22) (1.57) (0.64) (4.23)*
49.179 10.096 -0.628 5.142
2002-03 0.669 16.489
(0.74) (2.14)* (0.32) (5.15)*
55.935 2.931 1.688 5.642
2001-02 0.778 27.848
(1.28) (0.90) (1.20) (6.57)*
-82.164 12.399 4.483 8.704
2000-01 0.674 16.869
(0.89) (1.96) (1.45) (4.13)*
1999- 157.651 -7.002 11.561 5.183
0.19 2.794
2000 (1.07) (0.64) (2.05)* (0.94)
216.579 3.061 -0.887 0.13
98-99 -0.132 0.107
(2.58)* (0.56) (0.32) (0.16)
234.042 4.257 -3.35 0.284
97-98 -0.079 0.436
(2.16)* (0.65) (0.91) (0.27)
337.003 2.08 -5.967 0.519
96-97 -0.072 0.483
(2.07)* (0.28) (1.09) (0.33)
278.062 0.719 -5.094 0.498
95-96 -0.08 0.43
(1.75) (0.15) (0.88) (0.74)
254.059 -2.024 -1.76 0.543
94-95 -0.094 0.341
(2.05)* (0.56) (0.37) (0.63)

Numbers within the brackets indicate t values = Correlation/Standard Error

* indicates t values greater than 2 @ 5% significance level
We can see that among NPR, RONW and EPS, EPS has a better
relationship with market prices.

The t values for EPS are more than t values for NPR and RONW. Also
in the recent 4 years from 2000-2004, the t values for EPS is highly

The R2 values for the years 1999-2004 are positive. This indicates that
the relationship is very significant.

This clearly shows that in India, investors’ decision is based on the EPS.

Model 1 shows the nature of relationship between Market prices and

EVA and Model 2 shows that EPS is the strong influencing factor among the
three measures considered. So the next Model is used by integrating both the
models and it considers all the four measures- NPR, RONW, EPS and EVA,
to explain the relative comparisons.
Model 3

Y=a+b1x1+b2x2+b3x3 +b4x4

Y is Market price
X1 is NPR
X2 is RONW
X3 is EPS
X4 is EVA
a is the constant
bi are the co-efficients

Table No. 13
Co-efficient of regression, t statistic, Adjusted R2 and F values from the year

Years a b1 b2 b3 b4 2 F
46.371 12.029 -1.676 9.479 -0.0289
2003-04 0.406 4.936
(0.28) (1.46) (0.44) (4.15)* (0.37)
59.121 9.478 -0.384 5.235 -0.02303
2002-03 0.656 11.971
(0.84) (1.91) (0.19) (5.07)* (0.51)
50.37 3.333 1.417 5.551 0.02128
2001-02 0.768 20.063
(1.08) (0.95) (0.90) (6.14)* (0.41)
-73.309 11.327 6.489 9.089 -0.136
2000-01 0.678 13.087
(0.79) (1.78) (1.82) (4.28)* (1.10)
1999- 235.442 -6.13 12.711 5.893 -0.347
0.264 3.064
2000 (1.60) (0.59) (2.34)* (1.12) (1.74)
161.287 4.682 -1.702 -0.451 0.256
98-99 -0.031 0.83
(1.87) (0.88) (0.63) (0.55) (1.77)
152.345 5.905 -4.252 -0.128 0.401
97-98 0.112 1.723
(1.46) (0.99) (1.27) (0.13) (2.30)*
188.524 4.832 -5.401 0.0071 0.517
96-97 0.057 1.346
(1.10) (0.69) (1.05) (0.01) (1.93)
83.196 1.623 -1.267 0.417 0.444
95-96 0.092 1.583
(0.49) (0.37) (0.23) (0.68) (2.19)*
84.883 0.268 -0.349 0.208 0.932
94-95 0.224 2.662
(0.72) (0.09) (0.09) (0.28) (3.03)*

Numbers within the brackets indicate t values = Correlation/Standard Error

* indicates t values greater than 2 @ 5% significance level
We can see that the traditional measure EPS has better relationship
with the market prices in the recent years--- 2000-2004.
The t values for EPS are statistically significant. But in the earlier years
94-98, the t value for EVA is statistically significant. This shows that there is
significant relationship between EVA and market prices.
In the recent years the Fcal > Ftab, so the null hypothesis is accepted.
But for the years 95-99 the Fcal < Ftab, indicating that there is relationship.
So EPS is still a measure used by the investors to predict the share
prices of the company and to take investment decisions.

The R2 values for all the years, excepting 1998-1999 are positive. This
indicates that the relationship is very significant.
Creating shareholder value is a fundamental requirement for all the
companies. Therefore, most of the leading companies adopt the mantra of
shareholder value to meet the increasing expectations of the share holders.

According to various researches conducted in the recent past in India

and worldwide, the conclusion is, even though EVA is correlated to stock
returns, it is not much greater than the correlation between accounting profit
and stock return. Therefore, though EVA might be incrementally better over
other measures, it does not really provide any significant informational

To see whether this relationship holds good the study has been
undertaken by taking 24 companies which are listed in BSE and are a part of
SENSEX, for a period of 10 years. The market prices of the shares are
compared with the 4 performance measures - NPR, RONW, EPS and EVA, to
analyse the extent of influence of each on the share prices.

A cross sectional analysis using regression is used to test the

relationship. The results show that there is no significant relationship between
EVA and market prices; also EPS is strong influencing factor among the
variables. Investor’s decisions rely on the EPS as it is well published
information and is directly related to P-E multiple which is used by the fund
managers for predicting the share prices of the companies.

Though academicians, professional communities and evaluating firms

give importance to EVA, investors do not consider this for their investment
There is no significant relationship between EVA and market prices.
Though there exists relationship between the variables during earlier periods,
this may be because of chance factor and not because of cause factor.
Among the various performance measures, EPS has a better
relationship with the market prices.
Investors do not use all the available information. Investors should be
cautious while taking investment decisions and should consider other
measures which indicate the value created by the firm rather than the
earnings they get.
EPS is not the only measure which indicates the company’s
performance as it can mislead the investors, and can be increased by
reducing the no of shares.
The investors depend more on the readily available and easily
computable measures rather than complicated measure like EVA as it
requires lot of adjustments and calculations, unlike other measures which can
be easily calculated or available from the financial statements.

Text Books

o Financial Management, Theory and Practice

-Prasanna Chandra
(Sixth Edition)
o Research Methodology
-Donald Cooper and Pamela Schindler
(Eighth Edition)
o Statistics for Management
-Richard I Levin and David S Rubin
(Seventh Edition)

Articles of ICFAI
(The Institute of Chartered Financial Analysts of India)

o “Computation of EVA in Indian Banks”, by Roji George, the ICFAI

Journal of Bank Management, Vol IV, No. 2 , May 2005, Pg No. 30-44.

o “Value-based management: An Introduction to the concept of

Shareholder value”, by David Gowther, ICFAI Journal of Applied
Finance, , Vol VII, No. 1 , Jan 2002, Pg No. 12-18.

o “Facets of Shareholder Value creation”, by V.V.Gopal, The ICFAI

Reader, May 2005, Pg No. 33-37.

o Database of Capital Market Publishers (India) Ltd., Capitaline 2000