Introduction and origin: The aim of any professional organization is to maximize the wealth of share holders, which is measured by the returns they receive on their investment. Returns are in two parts, first is in the form of dividends and the second in the form of capital appreciation reflected in the market value of shares. But the market value of shares is influenced by a lot of factors, many of which may not be fully influenced by the management of a firm. However one factor which has a significant influence on the market value is the expectation of the shareholders regarding the return on the investment. The question then arises is which measure of corporate performance is liked to be expectation of the shareholders. Various measures like Earnings Per Share (EPS), Return On Equity (ROE), Return On Investment (ROI) and Return On Capital Employed (ROCE) have been used to evaluate the performance of the business. The problem with these performance measures is that they lack a proper bench mark for comparison. Because they ignore the minimum rate of return on investment expected by the share holders. To overcome this problem the consultancy firm Stern Stewart came up with a performance measure that takes into account the minimum returns required by the shareholders. They called this measure the Economic Value Addition (EVA) Definition & calculation of EVA : EVA is the return a firm earns in excess of the minimum required by the investors. As for the formal definition, EVA is calculated using the following formula. EVA = NOPAT – (WACC ^ CE) Where, NOPAT = Net operating profit after tax. WACC = Weighted Average cost of capital


CE = Capital employed Weighted average cost of capital is the weighted average of the cost of debt cost of equity and cost of preference capital with weightages equivalent to the proportion of each in the total capital. NOPAT is measured from the income statement by adding back interest payments and subtracting and adding non operating income and expenses respectively to the net profit figure. Capital employed consists of adjusted equity share holders fund, all interest bearing obligations and preference capital. Improving EVA: Following are the ways in which the EVA can be improved  Increasing NOPAT with the same amount of capital  Reducing the capital employed without affecting the earnings ie discarding the unproductive assets.   Investing in those projects that earn a return greater than the cost of capital. Reducing the cost of capital,, which means employing more debt, as debt is cheaper than equity or preference capital. EVA – Barometer for Better Management : EVA forces the management to expressly recognize its cost of equity and to take that cost into account in all its decision. It measures the amount of value a firm creates during a definite period through operating decisions that improve margins, efficiently utilize its production facilities, improve management of working capital and redeploy under utilized assets. Thus EVA can be used to hold management accountable for all economic outlays whether they appear in the income statement, on the balance sheet or in the foot notes to financial statement.


Draw backs of EVA:  It ignores inflation. So it is biased against new assets. Whenever a new investment is made capital charge is on the full cost initially, so EVA figure is low. But as the depreciation is written off the capital charge decreases and hence EVA goes up.  Since EVA is measured in Rupee terms it is biased in favour of large, low return businesses. Large businesses that have returns only slightly above the cost of capital can have higher EVA than smaller businesses that earn returns much higher than the costs.  Short term EVA can be improved by reducing assets faster than the earnings and if this is pursued for long it can lead to problems in the longer run when new improvements to the asset base are made. Corporate facts : According to the Economic Times Research Bureau, the aggregate EVA of the 100 large sample companies works out to just Rs. 95 crore in excess of what the same capital could generate had it been invested at 13 % rate of interest. Any system will bear fruits only when it is well implemented and has the support of all the parties concerned and EVA is no exception to this rule. Moreover as with any other system EVA too has limitations but it still stands as an improvement over measures like ROI and ROE and if implemented will be taking the limitations into account will yield better results.


Structure of power supply industry In December 1950 about 63% of the installed capacity in the Utilities was in the private sector and about 37% was in the public sector. The power Sector has been receiving adequate priority ever since the process of planned development began in 1950. the electricity generation increased from about 5.98) from meagre 1713 MW in 1950. About 85% of the villages have been electrified except farflung areas in North Eastern states.3.2 INDUSTRY PROFILE INDIAN POWER SECTOR The power sector has registered significant progress since the process of planned development of the economy began in 1950. The concept of operating power systems on a regional basis crossing the political boundaries of states was introduced in the early sixties. In spite of the overall development that has taken place. transmission and distribution of power almost exclusively in the public sector. country has made a tremendous progress. The per capita consumption of electricity in the country also increased from 15 kWh in 1950 to about 338 kWh in 1997-98. which was introduced. Similarly. which is about 23 times. where it is difficult to extend the grid supply. The Power Sector has been getting 18-20% of the total Public Sector outlay in initial plan periods. In the field of Rural Electrification and pump set energisation. Nuclear power development is at slower pace. The Industrial Policy Resolution of 1956 envisaged the generation. Hydro -power and coal based thermal power have been the main sources of generating electricity.1 billion units to 420 Billion units – 82 fold increase. Growth of Indian power sector Power development is the key to the economic development. the power supply industry has been under constant pressure to bridge the gap between supply and demand.1. As a 4 . Over the years (since 1950) the installed capacity of Power Plants (Utilities) has increased to 89090 MW (31. Remarkable growth and progress have led to extensive use of electricity in all the sectors of economy in the successive five years plans. registering a 52d fold increase in 48 years. in late sixties.

The National thermal Power Corporation (NTPC) and National Hydroelectric Power Corporation (NHPC) were set up for these purposes in 1975. operate and maintain the inter-State and interregional 5 . In some of these States separate corporations have also been established to install and operate generation facilities. The Act also provided for creation of central generation companies for setting up and operating generating facilities in the Central Sector. The Central Electricity Authority constituted under the Act is responsible for power planning at the national level. the Fifth Plan onwards i. the Government of India got itself involved in a big way in the generation and bulk transmission of power to supplement the efforts at the State level and took upon itself the responsibility of setting up large power projects to develop the coal and hydroelectric resources in the country as a supplementary effort in meeting the country’s power requirements. The Electricity (Supply) Act.result of this Resolution and facilitated by the Electricity (Supply) Act. To construct. In the Constitution of India "Electricity" is a subject that falls within the concurrent jurisdiction of the Centre and the States. In addition the Electricity (Supply) Act also allowed from the beginning the private licensees to distribute and/or generate electricity in the specified areas designated by the concerned State Government/SEB. the electricity industry developed rapidly in the State Sector. Most of the States have established State Electricity Boards. 1974-79. From. In the rest of the smaller States and UTs the power systems are managed and operated by the respective electricity departments. Tehri Hydro Development Corporation (THDC) and Nathpa Jhakri Power Corporation (NJPC). During the post independence period. In a few States private licencees are also operating in certain urban areas. North-Eastern Electric Power Corporation (NEEPCO) was set up in 1976 to implement the regional power projects in the North-East. 1948. provides an elaborate institutional frame work and financing norms of the performance of the electricity industry in the country.e. the various States played a predominant role in the power development. Subsequently two more power generation corporations were set up in 1988 viz. The Act envisaged creation of State Electricity Boards (SEBs) for planning and implementing the power development programmes in their respective States. 1948.

With a view to improve the functioning of State Electricity Boards. the Haryana Government has also initiated reform programme by unbundling the State Electricity Board into separate companies and Haryana Electricity Regulatory Commission has already been constituted. in the process. Governments of Uttar Pradesh. Power sector reforms The Orissa Government was the first to introduce major reforms in power sector through enactment of Orissa Reforms Act. Power Supply to agriculture and domestic consumers is heavily subsidized. Orissa Grid Company and Orissa Electricity Regulatory Commission have been formed. their internal resources generation during the next ten years will be negative. In this respect. 1998 more and more States are coming up with an action plan to undertake the reform programmes.000 crore. If the SEBs were to continue to operate on the same lines. the State Governments have constantly interfered in tariff setting without subsidizing SEBs for the losses arising out of State Governments desire to provide power at concessional rates to certain sectors. Rajasthan. the Government promulgated the State Electricity Regulatory Commission Act for establishment of Central Electricity Regulatory Commission at the national level and State Electricity Regulatory Commission in the States for rationalisation of tariff and the matters related thereto. Although the tariff is fixed and realized by SEBs. This raises serious doubts about the ability of the States to contribute their share to capacity addition during the Ninth Plan and thereafter. Orissa Generating Company. Under this Act. have been incurring heavy losses. Subsequent to the enactment of ERC Act.(-) 77. 1995. being of the order of Rs. especially agriculture.transmission systems the National Power Transmission Corporation (NPTC) was set up in 1989. The SEBs. This highlights the importance of initiating power sector reforms at the earliest and the need for tariff rationalization. Only a part of this subsidy is recovered by SEBs through cross subsidization of tariff from commercial and industrial consumers. Similarly. 6 . Current problem of power sector The most important cause of the problems being faced in the power sector is the irrational and unremunerative tariff structure. The corporation was renamed as POWER GRID in 1992.

Karnataka and Maharashtra have referred their proposals for setting up independent regulatory mechanism in their States. 7 . With these efforts. The Governments of Orissa and Haryana have already initiated reforms in the distribution sector by setting up distribution companies for each zone within their States. Other States are also in the process of introducing the reforms in the transmission sector. it is expected that the performance of power sector will improve because of rationalisation of tariff structures of SEBs and adequate investment for transmission and distribution sector.Madhya Pradesh. the CTU/STU would recommend to the CERC/SERC for issue of transmission license to the private company. Goa. The Electricity (Amendment) Act 1998 was passed with a view to make transmission as a separate activity for inviting greater participation in investment from public and private sectors. In view of the urgent need to reduce transmission and distribution losses and to ensure availability of reliable power supply to the consumers reforms in the distribution sectors are also been considered by establishing distribution companies in different regions of the State. The entry of private investors will be encouraged wherever feasible and it is proposed to carry out these reforms in a phased manner. On selection of the private company. In this regard. The participation by private sector in the area of transmission is proposed to be limited to construction and maintenance of transmission lines for operation under the supervision and control of Central Transmission Utility (CTU)/State Transmission Utility (STU). the Government of Karnataka is the first to invite private sector participation in transmission by setting up joint-venture company.

BHEL has Installed equipment for over 90. together with technologies developed in its own R&D centres. etc. 8 . eight service centres and 18 regional offices. enables the Company to promptly serve its customers and provide them with suitable products. systems and services -. The high level of quality & reliability of its products is due to the emphasis on design.for Utilities. Captive and Industrial users. BHEL has acquired certifications to Quality Management Systems (ISO 9001).25. ushering in the indigenous Heavy Electrical Equipment industry in India . BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz. today.000 MVA transformer capacity and other equipment operating in Transmission & Distribution network up to 400 kV (AC & DC). Transportation.efficiently and at competitive prices. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77.. BHEL has Supplied over 2. BHEL was established more than 40 years ago. Telecommunication. The wide network of BHEL's 14 manufacturing divisions. over 100 project sites. four Power Sector regional centres. Industry. Renewable Energy. Power Generation & Transmission. engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world.a dream that has been more than realized with a well-recognized track record of performance. Environmental Management Systems (ISO 14001) and Occupational Health & Safety Management Systems (OHSAS 18001) and is also well on its journey towards Total Quality Management.3 COMPANY PROFILE BHEL is the largest engineering and manufacturing enterprise in India in the energyrelated/infrastructure sector.000 MW of power generation -.1.

000 kms Railway network. closing of 5 unviable units and offer of VRS to employees. BHEL's vision is to become a world-class engineering enterprise. The company is striving to give shape to its aspirations and fulfill the expectations of the country to become a global player. Fertilizer. Transportation. This enables BHEL to have a strong customer orientation. This would improve the financial health of the company and reduce dependence on forest resources.52. BHEL has Supplied over one million Valves to Power Plants and other Industries. by Govt. Cement plants. a positive work culture and participative style of management ? all these have engendered development of a committed and motivated workforce setting new benchmarks in terms of productivity.20 cr. quality and responsiveness. BHEL has Supplied Traction electrics and AC/DC locos to power over 12. Continuous training and retraining. Shri Manohar Joshi laid a foundation stone on July 14.BHEL has Supplied over 25. to be sensitive to his needs and respond quickly to the changes in the market. 2000. The greatest strength of BHEL is its highly skilled and committed 42. Telecommunication & Renewable Energy . Every employee is given an equal opportunity to develop himself and grow in his career. 2000 for a deinking Plant in Hindustan Newsprint Ltd... The major elements of financial and organisational restructuring include fresh infusion to the extent of Rs.395 crs. committed to enhancing stakeholder value. Industry including Transmission. Petrochemicals. Refineries. Aluminum. Minister for Heavy Industries and Public Enterprises. Kerala at a cost of Rs. 2. namely Power. etc. was approved by the Govt. Kottayam. 9 . BHEL's operations are organized around three business sectors. BHEL ACHIEVEMENTS: 1. A turnaround plan for HMT Ltd.and Overseas Business.600 employees. career planning. Steel. in July. formation of subsidiaries for machine tools & Watch business groups.000 Motors with Drive Control System to Power projects.

have introduced a Voluntary Separation Scheme (VSS) providing benefits of VRS as a safety net to the employees of the PSEs facing the prospects of closure.75 cr. 8. 5. ‘Alto-LX’ and ‘AltoVX’. in 1998-99. in 1999-2000 against a production of Rs. 4. 306 MVA. Government of Bangladesh. The management of Lagan Jute Machinery Company Limited (LJMC). from Indian Oil Corporation Limited (IOC).703 cr. for their Panipat Refinery in Haryana and Barauni Refinery in Bihar.75 MV/400 KV three-phase Generator Transformers for their 1000 MW Tehri Hydro Project in Uttar Pradesh.1999. 10 . Govt.7.Murlidhar Ratanlal Exports Limited (MREL) ( on 4. Bharat Heavy Electricals Limited (BHEL) bagged the following major orders:i. which was implemented from 1. approved financial restructuring and a package of assistance for Hindustan Cables Ltd. erection and commissioning of 4 Nos. already (upto Nov. Maruti Udyog Ltd. in 1998-1999.2000) by way of transfer of 6330 shares of LJMC in favour of MREL. Govt. Two orders worth Rs. erection and commissioning of 30 MW & 20 MW Gasbased cogeneration power plant respectively. ii. BHEL registered a substantial jump in the physical export order booking of Rs.4. An order worth Rs. in 1999-2000 against a booking of Rs. 9. iv. An Industrial Show was organised in Rajkot sponsored by the Ministry of Heavy Industries & Public Enterprises with the aim of increasing co-operation in heavy and small scale industries. testing. against stiff international competition from Tehri Hydro Development Corporation (THDC) envisaging complete design. VSS provides benefit of ex-gratia under VRS which is much higher than the compensation under the ID Act.25 cr.69 crs. Bangaladesh from the Bangladesh Power Development Board.106 crore. In the current year 2000-2001 also the company has bagged orders of Rs. 15.100 cr. Setting up of Frame 9 Gas Turbine based Power Plant on turnkey basis at Baghabari.217 cr. 6. 2000) in the international business segment.3. 7.650 crs.784 cr. supply. 1947. Some of the major PSEs of DHI participated in the show. The company achieved highest ever production of Rs. and Rs. An Asian Development Bank (ADB) funded order from Arunachalam Sugar Mills Limited for 4 MW Steam Turbine-Generator (STG) for their Cogeneration Power Plant at Thiruvannamalai in Tamil Nadu. envisaging manufacture. iii. manufacture. valued at Rs. launched three new models namely ‘Baleno Altura’. In some of the sick PSEs considered unviable by the BIFR/Expert Agency. a subsidiary of Bharat Bhari Udyog Nigam Limited (BBUNL) has been handed over to M/s.

An employee of BHEL’s Seamless Steal Tube Plant. xiii. x. viii. An order for Steam Generators from Hindalco Industries Limited (Hindalco). ii. xvi.365 crore from Karnataka Power Corporation Limited (KPCL) for setting up 210 MW unit at Raichur thermal power station with synchronization targeted in a period of 28 months. won the coveted Prime Minister’s Shram Bhushan Award. Order for supply of 11 numbers of flame proof motors upto 900 KW capacity ratings from Ingersoll Dresser Pumps (IDP). from NALCO for its captive power plant at Angul in Koraput District of Orissa. valued at Rs. 330 MW. An order valued at Rs. BHEL marks its entry into the Port Automation business areas. A 24 MW Steam Turbine Generator (STG) set by Rama Newsprint and Papers Limited (RNPL) for their steam turbine based cogeneration power plant at Surat in Gujarat. gas based power project in Delhi. An order for the design.. xv. Two largest ever export orders cumulatively valued at Rs. vi. Power Plant equipment ever exported from India. Achieved a milestone by synchronising the second Unit of 250 MW in a record time of 20. An order worth Rs. xi. against stiff International Competition. 11 ..Tiruchirapalli.250 cr.295 crores. With this order. manufacture. The order was won by consortium of BHEL with Japan Radio Company. First ever export order an Independent Power Project (IPP) in Sri Lanka for manufacture and supply of Gas Turbine generating equipment (124 MW ISO rating) along with associated auxilliaries and spares.131 cr. valued at Rs. thereby setting a benchmark in schedule for commissioning of new projects in the country. located in different parts of Zambia.v. Eco-friendly Advance Class Gas Turbine for a 95 MW Perungulam Combined Cycle Power Plant (CCPP) of Tamil Nadu Electricity Board (TNEB) valued at Rs. Some other achievements of BHEL are as under : i. A turnkey order from Indian Oil Corporation (IOC) for setting up an energy efficient & environment friendly 20 MW co-generation power plant at Digboi Refinery Complex in Assam. ix. These orders are of special significance. 159 MW.125 crore for enhancing the capacity of Hindalco’s captive power plant at Renusagar in Uttar Pradesh. xiv. An order worth Rs. being funded by the World Bank.68 crore. supply and testing of one number Hydro Turbine (Kaplan type) of 15 MW for unit 4 of Kurichu Hydro Electric Project (HEP) in Bhutan.810 crores from Delhi Vidyut Board for setting up an environment friendly. xvii.5 months at Suratgarh Thermal Power Station (Stage I) in Rajasthan. for setting up of a new substation at Lusaka West besides rehabilitation of 11 existing 330 KV & 132 KV class substations. An order for a state-of-the-art Vessel Traffic Management System (VTMS) from the New Mangalore Port Trust. to be commissioned in 30 months’ time. 10. UK. xii.870 Crores for manaufacture and supply of large size Gas Turbine Generating Units to Government of Iraq under the United Nations "Oil for Food" program. vii. as they envisage the highest rating. Largest ever overseas turnkey substation contract (330KV) valued at Rs.

for the manufacture of new generation Distributed Control Systems called ‘MAX 1000+Plus’. vi. low operating costs and safer plant operation. iv. BHEL bagged the highest award of its kind in the country from the Indian Value Engineering Society for adopting Value Management as an organised corporate activity. Union Minister for Heavy Industries and Public Enterpriese in New Delhi on 27th September. one of the world leaders in the field. This project has linked the 196 km. Among public and private sector companies. since its inception in 1998-99. USA. with the commissioning of the 200 MW. India has joined a select band of advanced countries in the world capable of executing stateof-the-art HVDC projects. BHEL successfully commissioned 600 MW Ranjit Sagar Hydro Electric Project (HEC) in Punjab which is expected to ease the power situation in the power deficit State of Pubjab and cater to the power requirements of Himachal Pradesh and Jammu & Kashmir. These special purpose valves designed and developed indigenously have been exported to Taiwan for the first time in a tight schedule of just 3 months. in the cataegory of Engineering Consultancy. With this. BHEL has achieved yet another landmark in the high-tech area of High Voltage Direct Current (HVDC) technology. Bangalore plant became the first electronic equipment manufacturing unit to receive the coveted ISO-14001 certification of Det Norske Veritas (DNV). for the year 1998-99 for outstanding export performance. BHEL has been adjudged the best organisation. Employees of BHEL contributed a sum of Rupees One Crore to the Prime Minister’s National Relief Fund. BHEL has become the first company in the country capable of offering indigenously developed Ceramic Disc Insulators for + 500 KV High Voltage Direct Current (HVDC) applications. the prestigious ‘Samman Patra 19992000’ instituted by Ministry of Finance has been awarded to the Company for their unblemished track record with Airport Customs in terms of payment of Custom Duties. BHEL and the two utilities – APSEB and MPEB. Technical know-how & other Engineering Services Exporters’. The project has been jointly funded by the Department of Heavy Industry. Amongst public and private sector companies in the country. ix. A cheque to this effect was presented by Shri K. vii. xiii.G. xi. Won the All India Trophy for Top Exporters.Ramachandran. for honest and prompt payment of customs duties. For the second consecutive years. reliability. 200 KV National HVDC project (Stage-II).iii. BHEL successfully executed an export order for specially designed valves for the Petroleum Industry in Taiwan. This system offers extremely fast response time resulting in higher efficiency. Ministries of Power & Information Technology. viii. BHEL. BHEL has entered into Technical Collaboration with MAX Control Systems Inc. DC transmission line between Barsoor in Chhatisgarh and Lower Sileru in Andhra Pradesh. to Shri Manohar Joshi. xii. CMD. 12 x. BHEL won prestigious award namely "Golden Peacock National Quality Award 1999" instituted by the Institute of Directors (IOD) for achieving excellence in quality conforming to global standards.2000. v. .

As many as 15 new models were added by HMT for Mechanical Watches and 99 new models for Quartz Watches. 14. 13 . Turning Centre Stallian 100. (BSCL) obtained ISO-9002 accredition during the year for its Magnesia production activities. Machine Tools Division of HMT introduced a no. Salem Works of Burn Standard Co. Bangalore. Braithwaite. Action for closure of other sick PSEs is under process. Senegal under contract from Ministry of External Affairs. have granted permission for closure of Rehabilitation Industries Corporation Limited (RIC) and Weighbird India Limited (WIL) in pursuance of the Government decision to close down six sick and unviable PSEs. The awards were presented by Dr. 17.42 cr.19. HMT implemented Entrepreneur and Technical Development Centre (ETDC) at Dakar. Ltd. 11. The scope of Project covered supplies and installation of machines and equipment.9 cr.13. 18. Drill Tap Centre DT40. Order for construction of Fourth Krishna Bridge near Vijayawada valued at Rs. civil and Electrical and deputation of Experts for imparting on-the-job training. Government of India. Vertical Machining Centre VCM 400 and VMC 800S.Ltd. Ranipet and Jagdishpur for outstanding achievements in terms of highest accident free period and lowest accident frequency rate.xiv. ii. Union Minister of Labour on 17th September. HMT launched two new models of Tractors. 12 National Safety Awards have been won by BHEL’s plants located at Bhopal. Model 7511. 19.Satyanarayan Jatiya. from West Bengal Fisheries Corpn.86 cr. 2000. BBJ also diversified into marine related activity and procured a dredging order valuing Rs. of new products like Cylindrical Grinder PCG 130 APG. 15. of India funded contract for setting up Tool Shop Extension Project in Nepal. 16. 12. 13. Ministry of Labour. HMT was associated with Govt. the Appropriate Authority. Burn & Jessop (BBJ) bagged following major orders during the year : i. The company has also secured an order for setting up a tool room project in Turkmenistan. Hyderabad. Order for construction of 3 major bridges under North Frontier Railway in Siliguri – Bongaigaon Gauge Conversion Bridge against stiff competition valued at Rs. a heavy duty tractor for dry land cultivation and Model 3522 DX for ploughing and haulage work.

Andhra Pradesh and Gangapur Dam.81 crores). iv.13 crores. which envisages construction of Rain Water (RW) Reservoir. Another model 410D has been re-designed and type approved meeting pollution norms was introduced as Vikram 450D. EPI achieved the distinction of being amongst the top ten MOU signing companies. from National Thermal Power Corporation Limited (NTPC) for their Suratgarh Thermal Power Station (STPS).29 crores). Prime Minister’s MOU Award-Merit Certificate was awarded to EPI for Excellence in the Achievement of MOU targets for the year 1998-99. 25.09 crores) and Project Management Consultancy for development of industrial area on GT Road for Greater Noida Authority (Rs. 23. Gujarat.73 crs. 22. Scooters India Ltd.45 cr. Sardar Sarovar Canal based Drinking Water Project for supply of water to Bhavnagar. Amongst public and private sector companies in the country. Nashik Valuing Rs. (SIL) upgraded its model Vikram 750D which was type approved to meet the pollution norms. order worth Rs. Execution of Zero Flaring facilities at Gandhar. Three projects valuing Rs.85 cr. During this period.18. ii. Rajasthan. 21. Instrumentation Limited have bagged an order for Renovation & modernisation of Santaldih Power Plant in West Bengal at a cost of over Rs.12.27 crs. suratgarh.61. two projects Kothagudem Collieries.12 cr.32. v.0. valued at Rs. seven National safety awards were also bagged by the company.20. valued at Rs. BHEL won the maximum number of Vishwarkarma Rashtriya Puraskar for the years 1997 and 1998. RW Pump House. Egypt and Mynmar. Sri Lanka. Hindustan Paper Corporation (HPC) has been given the CAPEXIL award for its outstanding export performance in 1999-2000 when it exported a total of 12147 tonnes of paper valued at about Rs. Engineering Projects (India) Limited (EPI) bagged following major orders : i.16. for carrying out various civil construction works. Turnkey contract for laying Docklines at Paradeep (Orissa) for IOC (Rs. Civil work Forebay and pump house and other allied works.19 crores for construction of residential staff quarters at Juhu Aerodrome at Mumbai for Pawan Hans Helicopters Limited (Rs. to Bangladesh.29. 14 . iii. District Gujarat. 24.

Bharat Heavy Electricals Limited (BHEL) is. • Steam turbines for CPP applications. extraction. 15 . a name to reckon with in the industrial world. besides a large number of project sites spread all over India and abroad. Gas turbine based co-generation and combined-cycle systems for industry and utility applications. With an export presence in more than 60 countries. 4 power sector regional centres. 18 regional offices. It is the largest engineering and manufacturing enterprise of its kind in India and one of the leading international companies in the power field. enables BHEL to be close to its customers and cater to their specialised needs with total solutions . BHEL offers over 180 products and provides systems and services to meet the needs of core sectors like: power. THERMAL POWER PLANTS • Steam turbines and generators of up to 500MW capacity for utility and combined-cycle applications. transportation.efficiently and economically. GAS BASED POWER PLANTS • • Gas turbines of up to 260MW (ISO) rating. transmission. oil & gas. industry.PRODUCT PROFILE Established in the late 50’s. non-conventional energy sources and telecommunication. An ISO 9000 certification has given the company international recognition for its commitment towards quality. today. capability to manufacture steam turbines with super critical steam cycle parameters and matching generator up to 1000 MW unit size. capability to manufacture condensing. PRODUCT RANGE This list is intended as a general guide and does not represent all of BHEL's products and systems. 8 service centres. injection or any combination of these types. A wide-spread network comprising 14 manufacturing divisions. back pressure. BHEL is truly India’s industrial Ambassador to the world.

Stoker boilers. LSHS. Francis and Pelton types with matching generators. natural gas or a combination of these fuels: capability to manufacture boilers with super critical parameters up to 1000 MW unit size. lignite. bagasse or a combination of these fuels. using coal. ranging from 30 to 500MW capacity. ranging from 40 to 450t/hour capacity using coal. Spherical. Industrial stream turbines and gas turbines for drive applications and co-generation applications. • Steam generators for industrial applications. oil. LDO. Atmospheric fluidized bed combustion boilers. biomass. Gas turbines land matching generators ranging from 3 to 260MW (ISO) rating. pump turbines with matching motor-generators. lignite. Mini/micro hydro sets. butterfly and rotary valves and auxiliaries for hydro station DG POWER PLANTS • HSD.HYDRO POWER PLANTS • • • Custom-built conventional hydro turbines of Kaplan. • • • • Pulverized fuel fired boilers.5 to 120MW. natural-gas/biogas based diesel power plants. natural gas. industrial gases. for emergency. peaking as well as base load operations on turnkey basis. unit rating up to 20MW and voltage up to 11kV. Circulating fluidized bed combustion boilers. oil. BOILERS • Steam generators for utilities. 16 . INDUSTRIAL SETS • • • Industrial turbo-sets of ratings from 1. FO.

Tube mills for pulverizing low-grade coal with high-ash content. with capacity ranging from 25 to 800m3/s and pressure ranging from 120 to 1.800 m of gas column. • • Axial impulse fans for both clean air and flue gas applications. Chemical recovery boilers for paper industry.480 m of gas column. ranging from capacity of 100 to 1000 t/day of dry solids. BOILER AUXILIARIES  Fan • Axial reaction fans of single stage and double stage for clean air application. Single and double-suction radial fans for clean air and dust-laden hot gases applications up to 400oC. Pressure vessels.• • • Waste heat recovery boilers. Large regenerative air-preheaters for utilities of capacity up to 1000 MW.  Air-Pre-heaters • • Ljungstrom rotary regenerative air-pre-heaters for boiler and process furnaces. with capacity ranging from 4 to 600m3/s and pressure ranging from 150 to 1.  Gravimetric Feeders  Pulverizes • • Bowl mills of slow and medium speed of capacity up to 100 t/hour. with capacity ranging from 7 to 600m3/s and pressure up to 700 m of gas column.  Pulse Jet and Reverse Air Type Fabric Filters (Bag Filters)  Electrostatic Precipitators 17 .

 High-capacity safety valves and automatic electrical operated pressure relief valves for set pressure up to 200 kg/cm2 and temperature up to 550oC. 18 .  High and medium-pressure valves.  Mechanical Separators • Soot Blowers  Long retractable soot blowers (travel up to 12.• Electrostatic precipitators of any capacity with efficiency up to 99. electric or manual mode. industrial boilers and process industries. cast and forged steel valves of gate.  Piping Systems.  Swivel arm type soot blowers for regenerative air-preheaters. rotary blowers and temperature probes and related control panels operating on pneumatic. wall deslaggers. Constant Load Hangers.9% for utility and industrial applications. globe. Clamp and Hanger components. 250 kg/cm2 pressure and 540oC temperature. process and other industries for set pressure up to 175 kg/cm2 and temperature up to 565oC.2m). combined cycle plants. • Valves  High-pressure and low-pressure bypass valves for utilities.  Safety relief valves for applications in power. non-return (swing-check and piston lift-check) types for steam. variable Spring hangers for power stations upto 850 MW capacities. oil and gas duties up to 600 mm diameter.

Feed water heaters. Steam jet air ejectors. Electric Traction Equipment (for diesel/electric locos electric multiple units. diesel multiple units and urban transportation systems). Traction motors. POWER DEVICES • High power capacity silicon diodes. 19 . Columns. Surface condensers.HEAT EXCHANGERS AND PRESSURE VESSELS • • • • • • • • • CS/AS/SS/Nonferrous shell and tube heat exchangers and pressure vessels. Air-cooled heat exchangers. drums. thyristor power devices and solar photovoltaic cells. LPG/propane storage bullets. Reactors. Transformers smoothing reactors. Bogies. TRANSPORTATION EQUIPMENT • • • • • • • • • • • AC Electric locomotive AC-DC Dual Voltage Electric locomotive. Traction generators/alternators. LPG/propane store mounded vessels. Rectifiers. Diesel-Electric Shunting locomotive Diesel Hydraulic Shunting locomotive OHE Recording cum Test Car.

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economic profit is probably the best because it contains so much information : economic profit incorporates balance sheet data into an adjusted income statement metric 21 .1.4 NEED FOR THE STUDY • The implementation of complete EVA based financial management gives managers superior information and superior motivation to make decisions that will create the greatest shareholder’s wealth in any publically owned or private enterprise • EVA’s biggest selling point is its relative simplicity. • If you had to rely on only one single performance number. • It can readily be broken down to the level of a division. EVA is really just an alternate way of viewing corporate performances. a factory store or even the product line.

SECONDARY OBJECTIVE To choose a strategy that results in the maximum economic addition of shareholder value. To measure the true economic value of an enterprise that accounting omits.1. 22 . To study the importance of EVA in enhancing the pay-for-performance attitude in the organization.5 OBJECTIVES OF THE STUDY PRIMARY OBJECTIVE To measure the performance of an enterprise through EVA technique.

it helps managers clarify how they create value. it conveniently summarizes into a single statistic the value created and beyond all financial obligations. • Economic profit works best for companies whose tangible asset (assets on the balance sheet) correlate with the market value of assets –as is often the case with mature industrial companies.1. they do it either by investing additional capital that produces returns above weighted average cost of capital . by reducing capital employed in a business. Generally. • As an operational metric. economic profit is probably the best because it contains so much information (mathematicians would call it “elegant”) : economic profit incorporates balance sheet data into an adjusted income statement metric. by improving returns by growing revenues or reducing expenses or by reducing the cost of capital.6 SCOPE OF THE STUDY • If you had to rely on only one single performance number. 23 . • It is a residual performance metric.

economic profit can be subject to accrual distortions .For example . • Unless fully loaded and all cash adjustments are made. a company that does not reinvest capital to maintain its plant and equipment can improve its accrual bottom line simply by virtue of the declining D&A line. new economy and hightechnology companies. because net operating profit after taxes is after depreciation and amortization. • The companies least suited for economic profit are high growth. • EVA discourages big investments because the capital charge depresses EVA. This sort of attempt at boosting economic profit is known as harvesting the assets. This may be evened out due to depreciation charges over the useful life of the asset. thereby reducing the average capital employed. for whom assets are ‘off balance sheet’ or intangible. it is very risky to depend on an single metric. 24 .1.7 LIMITATIONS OF THE STUDY • Although some proponents argue economic profit is “all you need”.

Economic Value Added Defined Economic Value Added (EVA) may be defined as the net operating profits after tax minus an appropriate charge for the opportunity cost of all capital invested in an enterprise. EVA can be rewritten as EVA = (ROI – WACC) x CAPITAL EMPLOYED EVA captures the fact that equity should earn at least the return that is commensurate to the risk that the investor takes. In other words equity capital has to earn at least same return as similarly risky investments at equity markets.1 REVIEW OF LITERATURE Introduction The aim of any organization is to maximize the wealth of the shareholder.2. since its cost is explicit. Earnings per share and Return on investment are used as the most important performance measures. who own the organization and expect good long-term yield on their investment. The estimation of cost of debt is naturally more straightforward. pioneered the development of Economic Value Added (EVA) framework. Cost of debt includes also the tax shield due to tax allowance on interest expenses. communicating with investors. Cost of equity is usually defined with Capital asset pricing model (CAPM). although they do not theoretically correlate with the shareholder value creation very well. Cost of equity capital is the opportunity return from an investment with same risk as the company has. It is the measure that captures the true economic profit of the organization. Maximizing EVA means the same as maximizing long-term yield on shareholders’ investment. On the other hand if 25 . Stern Stewart & Co. Thus EVA = Net Operating Profit after tax – Weighted Average Cost of Capital Weighted average cost of capital is defined as the cost of equity share capital plus the post tax cost of debt multiplied by the debt equity ratio. which offers a consistent approach to setting goals and measuring performance. then there is no real profit made and actually the company operates at a loss from the viewpoint of shareholders. If that is not the case. This goal has often been ignored or at least misinterpreted. evaluating strategies and allocating capital. EVA as a value based performance metric seeks to measure the periodic performance in terms of change in value.

If the case is opposite. the market value is less than capital invested the company has destroyed shareholder value. all the items that are not debt (interest bearing or non-interest bearing) are classified as equity. Market Value Added = Present value of all future EVA This relationship between EVA and MVA has its implications on valuation. If a company’s rate of return exceeds its cost of capital.EVA is zero. Market Value Added for listed companies have been defined as the difference between the company’s market and book value. On the other hand. retained earnings and provisions. All this applies also to EVA.Capital invested And with simplifying assumption that market and book value of debt are equal. in this context.Book Value of Equity Book value of equity refers to all equity equivalent items like reserves. Thus positive EVA means also positive MVA and vice versa. this is the same as: Market Value Added = Market Value of Equity . Thus whether a company has positive or negative MVA depends on the level of rate of return compared to the cost of capital. Market Value Added = Company’s total Market Value . In other words if the total market value of a company is more than the amount of capital invested in it. this should be treated as a sufficient achievement because the shareholders have earned a return that compensates the risk Market Value Added Defined A return greater than the cost of capital adds to the value of the organization. companies that have rate of return smaller than their cost of capital sell with discount compared to the original capital invested in company. Thus market value added tells us how much has been added or reduced from the shareholder’s investment. In other words. By replacing the market value added with the present value of future EVA we can obtain the value of the company as: 26 . the company will have a positive MVA and will sell on the stock markets with premium compared to the original capital. the company has managed to create shareholder value.

pricing acquisitions or divestitures. including strategic planning. The enterprise still returns less to the economy than it devours in resources…Until then it does not create wealth. setting annual goals-even day-to-day operating decisions. Management System: EVA can give companies a better focus on how they are performing. just as if it were a wage. allocating capital. the goal of increasing EVA is paramount and thus removes a lot of confusion o 27 . Never mind that it pays taxes as if it had a genuine profit. it destroys it.Market Value of Equity = Book Value of Equity + Present value of all future EVA Diagrammatically it can be shown as: EVA1 + EVA2 +… (1+r) (1+r)2 -EVA1 + . procedures. "Until a business returns a profit that is greater than its cost of capital. The EVA system covers the full range of managerial decisions. In all cases. its true value comes in using it as the foundation for a comprehensive financial management system that encompasses all the policies.EVA2 +… (1+r) (1+r)2 Advantages of Economic Value Added o Measuring Profits the way shareholders count them: Peter Drucker has put the matter in a Harvard Business Review article as." EVA corrects this error by explicitly recognizing that when managers employ capital they must pay for it. it operates at a loss. methods and measures that guide operations and strategy.

but weigh prospective acquisitions against the likely contribution to earnings growth. Companies may evaluate individual products or lines of business on the basis of gross margins or cash flow. monitored. communicated and compensated in a single and consistent way always in terms of the value added to shareholder investment. EVA is the excess of ROI over WACC multiplied by the capital employed and thus as the ROI suffers from serious limitations of wrong periodizing and distortions caused by inflation the same gets incorporated in EVA also. Distortions caused by Inflation and Capital Structure: EVA is affected by the accounting policies. suffering from the same problems of accounting rate of returns (ROI etc. in a business unit. and it gives in valuations exactly same the answer as discounted cash flow. Business units may be evaluated in terms of return on assets or against a budgeted profit level. ROI is low at the beginning of the project as the capital base is high while at the latter stages the ROI shoots up because of the low capital base. Similarly inflation brings about distortion in the value of assets and affects EVA. o Pitfalls of EVA EVA is a value based measure.). Strategic plans often are based on growth in revenues or market share. Finance departments usually analyze capital investments in terms of net present value. o Wrong Periodizing: In case on a single project the normal depreciation schedules cause the ROI and consequently EVA to be small at the beginning of a project and big at the end of the project. office or assembly line Ending the confusion of multiple goals: Most companies use a numbing array of measures to express financial goals and objectives.o Financial measure line managers understand: EVA has the advantage of being conceptually simple and easy to explain to non-financial managers. EVA is the only financial management system that provides a common language for employees across all operating and staff functions and allows all management decisions to be modeled. or even in a single plant. the periodic EVA values still have some accounting distortions because EVA is after all an accounting-based concept. Paradox of EVA: We know that Market Value of Equity = Book Value of Equity + PV of all future EVA o o 28 . since it starts with familiar operating profits and simply deducts a charge for the capital invested in the company as a whole. Thus in long run a higher EVA will be reported if for example R&D costs are charged to the income statements and are not capitalized. In other words the historical asset values that distort ROI do distort EVA values also.

Investors need a measure that does not penalize investment.the key for start-ups is developing the product pipeline. EVA purports to assess shareholder value by calculating the amount by which profits exceed the cost of capital. Economic value addition in business The concept: 29 . Managers become reluctant to invest in future growth because capital that hasn't yet generated a profit reduces EVA. Such short-sighted approach can limit a company's growth.Thus the EVA valuation has two components book value and future EVA and by increasing the book value of equity we actually reduce the future EVA because of the capital costs and vice versa. Companies that use EVA often try to increase short-term shareholder value by minimizing their cost of capital. Implications EVA is based on the common accounting based items like interest bearing debt. Some critics say that EVA has a low correlation to shareholder value. EVA does not fit Internet start-ups because earning a positive EVA isn't all that important -. equity capital and net operating profit and it is usually always good when EVA increases and always bad when EVA decreases. But even in such industries the EVA financial management system can be successfully implemented with changes in the accounting procedure like changes in depreciation schedule. Introduced by Stern Steward and Company. forestry products. Industries like telecom. In other industries with a lot of current (instead of fixed) assets and with short investment period EVA can be easily used to the benefit of the shareholders. semiconductors etc are the ones with very cyclical investments (not smooth over the years) and/or industries with very long investment horizon suffer most from the pitfalls of EVA. pharmaceuticals. EVA is a good measure of performance but by itself the metric is not a good indicator of how much shareholder value a business is generating.

Weighted average cost of capital(WACC) 30 . Economic capital = Shareholder’s equity + + + good will written off Capitalised cumulative unusual loss Deferred tax +minority interest +total debt 2. If the result is positive then the firm created value over the period in question. It is obvious that one can get richer if he invest money at a higher return than the cost of that money to him. The cost of the capital in the EVA equation includes equity capital as wellas debt capital.In simple terms. economic value added is the profit that remains after deducting the cost of the capital invested to generate the profit. Net operating profit after tax (NOPAT) = Operating profit + _ _ Interest expense Unusual gain Taxes 3.it is basically the interest paid on the firm’s new debt. Calculating cost of debt is easy. The EVA is negative it is a value destroyer. Computation of EVA 1. The equity calculation is more complex as it varies with the risk the shareholder’s takes. A company creates value only if the return of the capital is greater than the opportunity cost of it or the rate the investors could earn by investing in other security with same risk. EVA is a essentially a repackaging of sound financial management and corporate financial principles that have been around for long time.

EVA shows the money value of wealth a business has created or destroyed in each reporting period. IMPLICATION • Translate accrual based operating profit(EBIT) into cash based net operating profit after taxes(NOPAT).(capital×WACC) Let’s now look at the overall calculation. EVA = NOPAT. • Equity capital is expensive(or at the very least nor free). True investments must therefore be recognised. • • Reclassify some current expenses as balance-sheet(equity or debt) items. say . Each of these is the mathematical implication of one of the three main ideas supporting the entire economic profit system: IDEA • Cash flows are the best indicators of performance. This expense must therefore be accounted for. EVA is profit the shareholders define it. a 10% return on their 31 . The accounting distortions must therefore be “fixed”. In other words. which can be broken down into three sets of calculations. Deduct a capital charge for invested capital Profits the way shareholders count them By taking all capital costs into account including the cost of equity. If the shareholders expect.Cost of equity Cost of debt WACC = (average out) 4. • Some expenses are really investments and should be capitalised on the balance sheet.

began to rank companies based on MVA. the new rankings were dramatically different from the Business Week rankings. relative to the 1988 MVA values. Everything before that is just building up to the minimum acceptable compensation for investing in a risky enterprise. the market value does not drop far below the net asset value). Taking the Stern Stewart 1000 companies as a point of departure and eliminating some companies for various reasons. The potential for liquidation. recovery. The research found that for companies with a positive EVA. did some research on the EVA and MVA of 613 companies in the USA. These rankings were based on market capitalization and not on performance. For the groups of companies with a negative EVA. even if the company has low or negative returns. The companies were ranked in terms of the average EVA for 1987 and 1988. Stern Stewart & Co. Stewart’s (1991) explanation for this was that the market value of shares always reflects at least the value of net assets. such as incomplete information. As they had expected. Finegan’s extensions of the EVA and MVA applications 32 . there was a very high level of correlation (as indicated by r2) between the level of EVA and the level of MVA. The study was based on the average EVA and MVA for each of 25 groups of companies (making up the 613). started tracking the best 1000 industrial and services companies in the United States of America (USA) in 1989. both for the average values used and the changes in values. The averages (per group of 25 companies) of the 1987 and 1988 EVA values showed an r2 of 97%. The groups were made up according to the companies’ rankings in terms of average EVA.investment. financial analysts Stern Stewart & Co. they ‘make money’ only to the extend that their share of after-tax operating profits exceeds ten percent of equity capital. The relationship for the changes in values was even better than that for the average values. Stern Stewart & Co. after he had become disillusioned with the company rankings of the magazine Business Week at the time. as well as on changes in EVA and MVA. recapitalisation or a takeover sets a floor on the market value (in other words. the correlation between the EVA and MVA levels was not as good. The pioneering studies of Stewart According to Stewart (1991:215).

The r2 of changes in EVA was 44%. compared to an r2 of 35% for changes in return on capital. All the results were based on averages and they are set out in Table 1. Stern’s comparison of EVA with popular accounting measures Stern (1993:36) argues that the key operating measure of corporate performance is not popular accounting measures such as earnings. dividends. earnings growth. compared to the second best other measure. Finegan (1991:36) then repeated the analysis of changes in MVA and again found EVA to be superior to the other measures. dividend growth. Table 1 MVA vs other financial performance measures Correlation with MVA EVA ROE Cash flow growth EPS growth Asset growth R2 50% 25% 22% 18% 18% 33 . the r2 for EVA relative to MVA was 50%.Finegan (1991:36) extended the initial analysis discussed above to include other measures. but in fact EVA. which was the measure that came closest to EVA in terms of its explanatory power. He focused on the middle 450 companies (actually 467 companies out of the original 613) where the MVAs were ‘tightly clustered’ and compared the power of EVA to that of more conventional measures such as EPS. return on capital and even growth in cash flow. growth in capital. the r2 of EVA was about three times better than that of changes in EPS growth. ROE. His research showed that the r2 for the relationship between MVA and various independent variables ranged from 9% for turnover growth to 25% for ROE rates. In this analysis. The explanatory power of EVA was found to be six times better than that of growth in EPS. The changes in the market value of a selected group of companies (specifically their MVAs) have been shown to have a relatively low correlation with the above accounting measures. with an r2 of 47%. which was return on capital. The results of the regression of MVA against EVA and other common performance measures showed that EVA outperformed the other measures quite considerably with an r2 of 61%. or even cash flow. By comparison.

share returns (dividends and changes in share price). ROE and return on sales [ROS]). Lehn and Makhija (1996:36) distinguished between companies that focus on their core business and ones that diversify and become conglomerates in the hope of exploiting economies of scale. In their study of the relationship between EVA. a strong inverse relationship was found between share prices and CEO turnover.Lehn and Makhija’s findings regarding EVA. MVA and CEO turnover revealed that the CEOs of companies with high EVAs and MVAs had much lower rates of dismissal than CEOs responsible for low EVAs and MVAs. 1988. All six measures correlated positively with share returns. The CEO turnover rate for companies with share returns above the median was 9.6%. MVA. Their research showed that companies with an above median focus earn an average share return of 31.Dividend growth 16% Turnover growth 9% Source: Adapted from Stern (1993:36) Lehn and Makhija’s work on EVA.2%. 34 . Firms with a below median focus earn 25%. share price performance and CEO turnover Lehn and Makhija (1996:36) conducted a study to find out how well EVA and MVA relate to share price performance and to see whether chief executive officer (CEO) turnover (the number of new CEOs during a given period) is related to EVA and MVA. compared to a 19% turnover for companies with share returns below the median. As expected. EVA and MVA. EVA correlated slightly better with the share returns than the other measures did. namely three accounting rates of return (ROA. 1992 and 1993. They selected 241 large US companies and gathered information about them for the four years 1987. These findings prove that a greater focus on business activities leads to higher levels of EVA and MVA. Lehn and Makhija (1996:36) have concluded that EVA and MVA are effective performance measures that contain information about the quality of strategic decisions and that serve as signals of strategic change. Six performance measures were computed per company for each of the four years. About two thirds of the companies operated in the manufacturing industry. MVA and corporate focus.

is systematically linked to the market value and that EVA is a powerful tool for understanding the investor expectations that are built into a company’s current share price. while the r2 was 33% for NOPAT and 31% for EVA. and free cash flows (FCFs) relative to market value divided by IC. by analysing the changes in the variables. net operating profit after tax (NOPAT). Two adjustments were made to the original model of Stern and Stewart. compared to 63% explained by NOPAT. compared to the 17% explained by NOPAT. as well as four other 35 . Uyemura et al. O’Byrne (1996:119) concluded that EVA. The second adjustment allowed for different capital multiples for different capital sizes. (1996:98) used a sample of the 100 largest US banks for the ten-year period from 1986 to 1995 to calculate MVA and to test the correlation with EVA. The first adjustment allowed for the fact that the EVA multiples were bigger for companies with a positive EVA than the EVA multiples for companies with a negative EVA.– EVA and wealth creation Uyemura et al.O’Byrne’s findings on EVA’s link to market value and investor expectations O’Byrne (1996:119) used nine years of data (for the period from 1985 to 1993) for companies in the 1993 Stern Stewart Performance 1000 to test the explanatory power of capitalized EVA (which is EVA divided by the cost of capital). a bigger multiple was used for companies with more invested capital. in other words. This adjusted model showed that EVA explained 31% of the variance in market values. The corresponding figures for ten-year changes in market value were 74% explained by changes in EVA. unlike NOPAT or other earnings measures. After making a further adjustment. compared to 33% explained by NOPAT. changes in EVA explained 55% of the five-year changes in market value. It looked as if NOPAT and EVA had almost the same explanatory power. His initial findings showed that FCF explained 0% of the change in the market value divided by the capital ratio.

For the 50 biggest US wealth destroyers. for net income it was 3% and for EPS it was 6%. ROE and ROA. 1997:39) studied the relationship between MVA divided by capital and EVA divided by capital for 983 companies selected from the Stern Stewart Performance 1000 for 1993 and 1994. the r2 was 83%. Grant’s analysis of relative EVA and relative capital invested Grant (1996:44. EPS.accounting measures. the results were not very different. This is in line with the findings of other researchers. namely net income (amount). The results of their regression analysis are set out in Table 2. The results for 1993 showed an overall r2 of 32% for all the companies. Standardised EVA (EVA divided by capital) again had an r2 of 40%. In an alternative approach where changes in the performance measures were regressed against standardised MVA. (1996:98) The analysis above clearly shows that EVA is the measure that correlates the best by far with shareholder wealth creation. For the 50 largest US wealth creators. These findings revealed a high level of correlation between MVA 36 . they showed that the r2 was 74% for the 50 largest wealth creators and 8% for the 50 largest wealth destroyers. for ROE it was 21%. while for ROA it was 25%. it was only 3%. When the same tests were repeated for 1994. Table 2 Correlation of different performance measures with shareholder wealth Performance measure EVA ROA ROE Net income (amount) EPS R2 40% 13% 10% 8% 6% Source: Uyemura et al.

He concluded that his empirical results indicate that EVA has a significant impact on a company’s MVA. instead of absolute values. Milunovich and Tsuei’s study on the use of EVA and MVA in the US computer industry Milunovich and Tsuei (1996:111) investigated the correlation between frequently used financial measures (including EVA) and the MVA of companies in the US computer technology industry (so-called ‘server-vendors’) for the period from 1990 to 1995.and EVA for companies with a positive EVA. The value of a company responds to variations in both the near-term EVA outlook and movements in the long-term EVA growth rate. Table 3 Correlation of different performance measures with MVA in the US computer technology industry Performance measure EVA EPS growth ROE Free growth FCF cash r2 42% 34% 29% 25% 18% Source: Milunovich and Tsuei (1996:111) Clearly EVA demonstrated the best correlation and it would be fair to infer that a company that can consistently improve its EVA should be able to boost its MVA and therefore its shareholder 37 . This insight led him to use standardized values for EVA and market value. but low levels of correlation for companies with a negative EVA. The results of their study are set out in Table 3. Grant (1996) found that the real corporate profits should be measured relative to the amount of capital needed to generate that level of profitability.

Benchmarking helps organisations refine their strategy through the re-examination of products. cash flow. An organisation can study practices and measure performance from within itself. A particular category of performance measures are financial performance measures. competitiveness. etc. customer satisfaction. By adopting a 38 . They concluded that growth in earnings is not enough to create value. operating income. debt/equity ration. p. Milunovich and Tsuei (1996:111) argue that the relatively weak correlation between MVA and FCF is due to the fact that FCF can be a misleading indicator.9). an organisation’s strategy is linked to its operations. Financial measures indicate to top-management whether their strategy execution is leading to better bottom-line results (Niven 2003. They are of the opinion that EVA works best as a supplement to other measures when one is evaluating shares and that EVA sometimes works when other measures fail. profitability. 57). Through key performance measures. An important concept in performance measurement is benchmarking. or against its industry peers. p. The financial metrics are based on information obtained from balance sheets. of an organisation resulting in improved performance (Moncla & Arents-Gregory 2003).19). quality. Benchmarking is the systematic process of searching for the best business practices. earnings per share. unless returns are above the cost of capital. Measuring shareholder value Value-based performance measurement: Performance measurement is the method of assessing a company’s progress towards achieving its preset goals. income statements and cashflow statements (Bogan & English 1994. Some examples of these metrics are revenue. gross profit. Benchmarking enables companies to compare their key performance measures internally or externally. structures and services against competitors and other industry leaders (Bogan & English 1994. growth. They point out that a fast-growing technology start-up company with positive EVA investment opportunities and a loss-making company on the verge of bankruptcy can have similar negative cash flows. innovative ideas and effective operating procedures to fuel progress and improvement (Bogan&English 1994. prices. strategies. practices.1). net income. The objective of performance measurement and management is to increase the shareholder value.p.p.value. long-term debt. etc.

value is the best metric of performance as it is the only measure that is comprehensive and hence is useful for decision-making. companies can maximize the value for other stakeholders (customers. 10). Many organisations have adopted a new breed of performance measure that are based on shareholder value. companies can identify the key performance metrics that would result in improved financial outcomes. p. labour and government (through taxes paid) and suppliers of capital). Second. p. Finally. 22). The shareholder value theory states that a company creates this value when it meets or exceeds a cost of capital that suitably reflects its investment risk (Lambert & Burduroglu 2000.Ashareholder is any holder of one or more shares in a company. known as value-based management. Companies are choosing to employ a system of measuring shareholder value for many reasons (Copeland et al 1994. The most common methods for measuring shareholder value are (Lambert & Burduroglu 2000. Shareholder value is the financial value created for shareholders by the companies in which they invest (Christopher&Ryals 1999. it is becoming vital for companies to be able to measure the value of these services in order to justify a premium price for the services and ensure continued profitability (Lambert & Burduroglu 2000). 2): • • • • • Customer satisfaction and customer value-added (CVA) Total cost analysis Profitability analysis Strategic profit model (SPM) Economic value-added (EVA) 39 . shareholders are the only stakeholders of a company who simultaneously maximize everyone’s claim in seeking to maximize their own. p. First. As customers place an increasing demand on companies to provide “value-added” services. The evidence of being a shareholder is in the form of a stock certificate. companies that are unable to create shareholder value will find that capital flows away from them and towards their competitors who are creating shareholder value. 2). p. By increasing shareholder value.performance measurement system based on financial measures.

Economic value-added (EVA) Stern Stewart & Co (www. DuPont. Table 1shows how to calculate a company’s EVA. The reason so many companies have adopted the EVA and have realized financial benefits are due to the advantages of its use. EVA is the net operating profit after tax (NOPAT) minus the capital charge of a company. In a Stern Stewart Research Special Report (Stewart et al 2002).com/) created the EVA to aid managers in their decision-making by incorporating two basic concepts of finance. Figure 2 shows how the above steps lead to 40 . The first is that the objective of any business is to maximize the value created for the company’s shareholders. companies that implemented the EVA in the 1990s outperformed their peers by an average of 8_3% per annum over the five years following its adoption. The report also showed that even in periods of economic slowdown. It is the return on the company’s total capital invested. The information required to calculate a company’s EVA is obtained from a company’s income statement and balance sheet. AT&T. Quaker Oats and General Motors. The NOPAT of a company is defined as the operating profit after taxes have been deducted. Second. The capital charge is an appropriate charge for the opportunity cost of all capital invested in a company. EVA-based financial management gives managers superior information. EVA aligns the decisions managers take with the creation of shareholder wealth. empowerment and accountability to ensure that their decisions create the greatest amount of shareholder value. EVA has been adopted by many companies including Coca Cola Inc. A continuous increase in EVA will result in an increase in the market value of the company. the value of a company is dependent on the extent to which shareholders expect earnings to be greater than or less than the cost of capital. EVA shows the dollar amount of wealth a company has created or destroyed. motivation. EVA clients earned a total return of 36_5% and beat the S&P 500 by a total of 69_8%.sternstewart. This enables managers to take decisions on increasing the efficiency of their capital and operations by focusing work on areas with higher productivity. EVA highlights the areas of the company that create value. and created total excess shareholder wealth of $116 billion.

goodwill and patents). The company’s working capital is difference of the total current assets and the current liabilities.742 million. the company exhibits relatively sporadic growth. if investors would usually require 14% on capital invested for this level of risk. ROIC. prepaid expenses. This article illustrates the computation of EVA. Incorporating such techniques as economic value added (EVA). with a market capitalization of $1. and MVA for Toll Brothers. notes payable and accrued liabilities. -Increasing NOPAT by increasing operating income -Reducing the capital charge by reducing the company’s capital and cost of capital • EVA is also shareholder-centric and hence of little relevance to the rest of the stake holders. and Mackey. 2001). A company can increase its EVA in the following ways. The company is of average size for the industry. VBM is a complete financial management and incentive compensation system that guides decision-making at every level. cash and other current assets. EVA is identical to residual income. Inc. which is generally characterized as having a high volatility of investment needs. Typical of the industry. which was largely abandoned by US companies years ago (Keys.the calculation of the EVA of a company. • Value-based management (VBM) has been referred to as the “fastest and hottest ticket” to shareholder wealth.g. Suppose a division produces a 12% return on capital invested. and market value added (MVA). return on operating invested capital (ROIC). the fixed assets and the intangible assets (e. Given the risk of the division's business line. The current assets include the company’s accounts receivables. The significant components of a company’s capital (C) are the working capital. less short-term debt. the division destroyed shareholder value by the EVA metric. but has maintained an average annual revenue growth of 18% over the last five years. a company in the home-building industry. Adopting companies use VBM as a guide in financial planning. inventory. monitoring.. Azamhuzjaev. The current liabilities is the sum of accounts payable. 41 . and controlling operations. This SternStewart has a trade mark on this term. A method of performance evaluation that adjusts accounting performance for investors' required return on investment.

Eli Lilly. in many instances. 42 . Russ Review of Business • Spring. its Market Value Added (MVA). A good example of EVA involving Coca-Cola and General Motors is presented in [4]. notably General Motors. and others have adopted this new financial tool and. Briggs-Stratton. when Coke first adopted EVA. one of the earliest users of EVA. AT&T. by Ray.S. Moreover. Coca-Cola. bull market significantly inflated stock prices.Economic Value Added: Theory. reported significantly improved financials. saw its stock price increase from $3 (on a split-adjusted basis) in 1981. Evidence.described EVA as "today's hottest financial idea and getting hotter.in a 1993 cover story -. investors had cumulatively supplied GM with $87 billion of equity. Coke's EVA experience seemingly contrasts sharply with the experience of some other firms not employing EVA. By 1995. Quaker Oats. Introduction In recent years. DuPont. increased by a factor of ten. so GM was actually destroying capital as it manufactured cars. and suggests that the missing link in the EVA process is productivity. This analysis offers a new definition of value. before the U. to over $60." Corporate giants such as Coca-Cola. calculated as the market value of all stock outstanding less its book value. Indeed. Economic Value Added has been touted by the popular press as the financial savior of the corporate world. Fortune magazine -. the relatively new financial-management tool. 2001 • Evidence is mixed regarding the efficacy of Economic Value Added (EVA). the market value of GM's stock was $69 billion. up to that year. generally found to be the engine of all economic growth. However. A Missing Link.

EVA is seemingly a powerful new financial management tool which is being used successfully and increasingly by some of our "best" corporations. the price of the product or service must at least be commensurate with .or. However.).In terms of stock price. In sharp contrast. and places EVA within the larger context of valuation metrics. Indeed. The following section defines value in such a way that the importance of productivity can be later identified. complaint resolution. On the surface. etc. as of 1995. The quality component of value includes the inherent quality of the particular product or service. Subsequent sections review the literature and suggest that the ongoing empirical dispute about EVA can be resolved by recognizing productivity (aided by a "measurement effect") as the missing link between EVA and better financials. The section thereafter places EVA within the larger context of valuation metrics. Value is simply the quality/price which is perceived/paid by the customer. commensurately lower than . incrementally aided by a well-documented measurement effect. What is "Value"? It may be helpful to begin this discussion by defining its core term. while Coca-Cola's investors have realized even greater returns. as well as all of its auxiliary features (follow-up service. This article reviews the theory and evidence regarding EVA. that the missing link between EVA and improved financials is actually productivity. viz. Coca-Cola's investors received $8. The analysis attempts to resolve the conflicting studies regarding EVA by offering a new hypothesis.. when the empirical surface is scratched.the perceived value of the product or service received. ideally.00 they had cumulatively invested in GM. GM's shareholders received only $. GM's investors have finally broken even. From the viewpoint of the customer. EVA doesn't seem to be quite the elixir purported by its proponents.63 in wealth for every dollar invested by 1995. If the bull market of the 1990's is factored in. or else the customer will feel that he or she has not received real value from the 43 .79 of wealth for every $1. EVA may be nothing more than a clever (and lucrative) re-packaging of some very old business principles.

. now. a million dollar accounting profit would be grossly inadequate if it required a trillion dollars of shareholders' money to accomplish the result. NPV has been extensively (and successfully) utilized for decades as the preeminent decision rule in project adoption. Secondly. too. In the long run. and are thus not a true measure of the actual cash earnings generated by a firm. and. Economic Value Added. economic value is difficult to measure. the key question becomes. How is value measured? Valuation metrics . The second measure utilized in valuation metrics is economic value." which is a registered trademark of Stern Stewart & Company. Not surprisingly. which can always be maximized by ignoring the long run health of the firm (e.the empirical measuring of value added . net present value. primarily because hard to ascertain. is a single period metric. Net present value (NPV) overcomes the drawbacks of both accounting and economic metrics. it. commonly referred to as "EVA. accounting value suffers from some well-known deficiencies.exchange. economic value. accounting earnings net out non-cash expenses. Although a superior metric than accounting value. the New York consulting firm which 44 . Although a relatively precise measure. First. Accounting value essentially measures the value added by a firm as the change in the firm's earnings.) Finally. of course). if a firm's customers perceive that they're not receiving value. by delaying or avoiding routine maintenance). accounting metrics tend to be single-period measures.include accounting value. (Obviously. accounting metrics ignore the returns required by shareholders. In addition to measuring incremental cash flows (the real income occurring to a firm from a particular project) over a multi-period time frame. and as adjusted on an aftertax basis. as imbedded in the Weighted Average Cost of Capital (WACC). Valuation Metrics In any discussion of value added. then the firm will almost certainly become just another corporate fatality (assuming free markets. it also considers the returns required by all suppliers of capital. EVA The newest evaluation metric is Economic Value Added. which is residual income left over after all suppliers of capital have been adequately compensated for the risk they've incurred. Besides.g.

t] =[r. Management Review.sub. Some of these applications are at significant variance with Generally Accepted Accounting Principles (GAAP).sub. the principals of Stern Stewart have been well remunerated in the process.t] / [C.t] is the firm's WACC at time t.sub.t])[C. its EVA.t] is the firm's return on capital at time t.sub.. such prestigious publications as Fortune.developed this tool. In its simplest form: [EVA. arbitrary) measures with which to implement NPV on scales larger than a project basis. Since its inception. The idea is not new: the return on any given increment of capital must be greater than the cost of that capital. depending upon the peculiarities of the particular firm they're advising. EVA is Net Operating Profit After taxes (NOPAT) less the dollar cost of the capital required to create that profit.sub. However. R&D and certain other expenses in order to ascertain the exact capital base being utilized (the denominator in equation (2)). Financial Executive. and firm-wide levels. or department's. and the Wall Street Journal have touted its virtues.t-1] is the firm's (or division's. In its essence.sub. divisional..t] . Needless to say.) capital at the beginning of the period. Critics of EVA argue that it is nothing more than NPV re-packaged at departmental. Chief Executive. and. the EVA measurement process departs (sometimes considerably) from conventional accounting standards.e. CFO.sub.sub.sub. in fact. EVA has received a lot of very favorable press. and [C. Such measures include capitalizing advertising. ultimately. After identifying the capital base.t] = [NOPAT.[K. Indeed.. the capital budgeting tool of internal rate of return has embodied this principle for many decades. They argue that Stern Stewart & Company's only real contribution to the capital budgeting and incentive compensation process is the development of (arguably. Investor's Business Daily.t-1] (1) where [r.t-1] (2) [k. [r. i. such as the capitalization of R&D and advertising.sub. Stern Stewart & Company utilize 164 variations (at last count) of their metric. 45 . the firm is then able to use NOPAT to find its return on capital and. Indeed.

almost all of us perform better when we know we're in the limelight (or. After all. which points out where value is being created by the firm. however. One study [7] reports 250 firms currently. a limelighted fish bowl). hence. and. while others [101 find statistically poor relationships between EVA and shareholder returns.The evidence in favor of EVA is mainly (but not entirely) anecdotal. the evidence is mixed. neither body of evidence seems to significantly outweigh the other. 2) productivity increases . A positive relationship between EVA and shareholder returns has also been found [9]. a powerful one). 46 . and satisfactorily.) So far. more precisely. (For a more comprehensive review of this conflicting evidence. Other studies [6] report that "the market seems more focused on 'profit' than EVA. This study seeks to resolve this controversy by suggesting that the missing link in the EVA process is productivity.it simply measures it. if used correctly.is a totally separate matter. hence. What the firm does with this measure .the real missing link between EVA and better financials. maximizing EVA should maximize the firm's share price and. This article argues that EVA is simply a measuring tool (albeit. the quantity and quality of employees' output increase when these same employees know that their output is being measured. in a rational market. significant correlation between EVA and MVA has been found [13. and where it's not.11]. The evidence against EVA essentially finds poor statistical relationships between EVA and various financial measures. some researchers [1. Some researchers [3] find little relationship between EVA and MVA (and.it might even choose to ignore it . The real reason why a firm's financials might improve after EVA adoption is twofold: 1) the measurement effect. 2] report very positive ad hoc experiences with EVA On an empirical level. and as numerous studies have confirmed. and new processes are introduced. using EVA For such firms. stock price). EVA does not create value -." In summary. a factor which has so far been ignored by both the proponents and the critics of EVA. as so often happens when new techniques. shareholder wealth. see [5]. This is simply human nature. In other words. and especially when we know that our livelihoods are at stake. new theories. The Fishbowl Factor So what is the "measurement effect"? As common sense would suggest.

which is found to be the ultimate driving force behind real economic growth and better financials. As many frustrated CFO's can attest. and k is the (weighted-average) cost of that capital. $1. Department of Labor.S. department. in fact. of course. in particular. As might be expected. stock prices. division.S. the firm's cost of capital is. the U." The study is essentially a massive review of the literature on productivity. in particular. Moreover. productive firms generally realize rising share prices and.productivity. the firm's return on its capital (the sum total of all assets being employed). improved performances in all of their financials (profits. EVA thus spurs people to get their corporate act together. Not surprisingly. Conceivably. and even at the individual level (holding. Doubters of this productivity premise are referred to a watershed 1993 study by the U. the firm 47 . more or less. In the long run. no laundry. cash flow. this self-fulfilling effect means that every person in the firm knows that they are being held accountable for every dollar allotted to them. countries with powerful productivities continually enjoy rising standards of living and greater productive capacities (witness. and soon. by how the market perceives the firm's riskiness). EVA and Productivity The second (and predominant) factor at play in the EVA process is the driving force behind all economic growth . political factors constant). firm. Probably the best way to see the relationship between EVA and productivity is to distill the EVA measuring tool down to its essence by reformulating equation (1) to the general expression: EVA = (r-k) capital (3) where r is. industry.15. the employee will soon realize another age-old principle: no ticket. "High Performance Work Practices and Firm Performance.). with its technology-driven productivity increases of recent years). each person also knows that they are expected to turn that dollar into something greater than a dollar . this "survival incentive" causes greater value to be created for the customer. again. At the national level.As applied to EVA. At the corporate level. etc.say. productivity is the driving force behind success at every level: national. If this transformation doesn't take place. determined by market forces (and.

could lower its cost of capital by mixing in more debt. such as CSX. then the potential for improvement exists in many areas by simply requiring the same output with less capital. since the impact would have a greater percentage-change effect upon the numerator in equation (2) than upon the denominator. a firm could increase its return on capital (and. In general. especially after seeing equation (2) presented previously. as this same referee also pointed out. depreciation can affect a firm's EVA-return on capital. but this creates more risk for shareholders. 48 . accelerated depreciation (chosen almost universally by firms in order to minimize taxes). except for an occasional instance. presumably. So now the million-dollar question becomes. but this presumes that the firm is inefficient. be minimal if scrupulous auditors require the firm to consistently employ Generally Accepted Accounting Principles. then obviously the only way for a reasonably efficient firm to increase its EVA is to increase its return on capital.e. Thus. by increasing its productivity. As an anonymous referee has pointed out. i. "How does a firm increase its return on capital"? The award-winning answer: primarily. the firm's capital cost is largely determined by outside forces. Algebra aficionados might point out. have used EVA to effect such requirements. using more capital than it needs to achieve any given outcome. hence. However. that reducing capital is another way to increase EVA. and is essentially a given over which the firm has little control. would tend to understate (relative to straight-line depreciation) the EVA returns on capital. Such manipulation should. this understatement will be uniform and consistent. it was operating in the first place).. If this is the case. and it also removes the firm from its optimal capital structure (where. If the cost of capital is a given.) This analysis focuses on firms which are already reasonably efficient. Moreover. (And some firms. so that it is not significant for EVA decision-making purposes. its EVA) by understating its assets.

the lower the productivity required for any given financial outcome. technology (the application of innovation). On the other hand. In general. the price of the firm's product or service will decrease due to a decrease in the firm's cost. Any of these four productivity outcomes alters the quality/price which is perceived/paid by the customer. productivity causes more value to be created for the customer. an increase in quality or a decrease in price. a decrease in its error rate (which leads to a decrease in its costs). A firm could be the most productive ever at manufacturing buggy whips. then it'll be a financial success. and vice versa. First. Any of these four outcomes is. EVA And herein lies the gist of this whole argument. In either case. and includes: innovation (the creation of something new). regardless. 2) increased quality. an increase in the firm's productivity. or a decrease in its defects (which is tantamount to an increase in quality) obviously increases the numerator of the quality/price ratio. over time. a firm could be embarrassingly non-productive. human capital investment (screening.What is Productivity? Productivity is a funny animal. When rational and informed investors see this increase in value added. Productivity vs. Free-market competition will.combine to accomplish one or more of four outcomes: 1) increased output per work-hour.especially innovation and technology -. or 4) decreased error/defects. and myriad other factors. by definition. Assuming the firm focuses on some sustainable demand. An increase in the quality of the product or service. training. 3) decreased costs. In general. In this same context. 49 . cause any or all of these cost reductions to be passed on (at least partially) to the consumer in the form of lower prices. but its long-run health would be doubtful. these factors -. or an increase in its output per work-hour. to say the least. the greater the consumer demand. then what causes productivity to increase? It's a long shopping list. it must be matched to consumer demand. but if it has a newly patented cure for cancer or AIDS. and compensation). thus creating greater value for the customer.

and where it's not. From the firm's perspective. commonsense idea of "profit". as discussed earlier. EVA and productivity are vitally and inseparably linked. some additional increment of value will be created by the "measurement effect. Although EVA is similar to Residual Income.") Thereafter. EVA is an internal financial tool which holds every manager in the firm accountable for every dollar allotted to them. From the market's perspective. Adopting the EVA measuring tool allows firms to see where value is being created. Hence. under some definitions there may be minor technical differences between EVA and RI (for example. or by increasing its productivity (the never-ending struggle for any firm competing in a free market). money cost of capital refers to the amount of money rather than the proportional cost (% cost of capital). In all three cases. Residual Cash Flow is another. the adjustments to NOPAT are unique to EVA.they'll naturally bid up the price of the stock as they scurry to buy slices of the greater profits generated by this bigger-and-better value pie. since it's largely market determined). these approaches are in a sense nothing more than the traditional. Although in concept. (Moreover. the utility of having a separate and more precisely defined term such as EVA is that it makes a clear separation from dubious accounting adjustments that have enabled businesses such as Enron to report profits while actually approaching insolvency. Comparison with other approaches Other approaches along similar lines include Residual Income (RI) and Residual Cash Flow. marginal increases in value added can be attained by either decreasing the firm's cost of capital (hard to do. one to the other. adjustments that might be made to NOPAT before it is suitable for the formula below). In general. the firm will find that value is being created wherever productivity (linked to demand) has pushed the firm's return on capital past its cost of capital. EVA is a very useful tool with which the firm can maximize the value of the firm. much older term for economic profit. Other measures of shareholder value include:    Added Value Market value added Total Shareholder Return 50 . at the same time.

In principle. Mathematically. firms must improved their strategic and scenario planning.. No longer will managers and workers be forced to focus on tracking unidimensional local optima for want of a better measure. In accounting terms.'' And emerged as a reliable performance metric. Explains Anil Sachdev. the concept of EVA is based on the principle of residual income. The Coca-Cola Co.Abstract This paper measures property companies’ performance under new economic performance metric known as Economic Value Added (EVA) and identifies which companies perform better. The logical extension EVA can be used to evaluate the contribution of individual products. However. 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. management should focus more on investing capital in the high return projects and at the same time improving on optimal capital structure. and eliminated the worst of accounting practices. Stern Stewart lists 168 51 . Literally. The EVA is an economic performance metric proposed by Stern Stewart Management Services. the result of the present study shows that most property companies in Malaysia fail to generate enough income to cover their cost of capital. In order to have positive EVA in the future. and thus indicating failure in creating corporate wealth. measures EVA at the level of each bottle (or can) of beverage it sells. It claims to have successfully eliminated financial and accounting distortions and provides a true measure of a company’s success in driving shareholder value. acquisition pricing. garbage out. It has taken the best of the residual income concept. Where the technique of EVA scores over the plain-vanilla residual income method is in its ability to identify the contribution of every unit of a company's output to. 45. employees and departments. for instance. but EVA is a significant improvement over it. In realizing this. EVA’s effective deal with accounting anomalies A measure is only as reliable as the components on which it is based. The EVA methodology sanitises the financial information it uses. even traditional accounting is based on the residual income principle: the Profits After Tax (pat) is the residual income after the payment of interest and dividend. or. Garbage in. it is the difference between the Net Operating Profits After Taxes (NOPAT) and the capital charge. Eicher Consultancy Services: ''The concept of residual income has been around for years. and strategic planning. and its impact on. goal-setting. EVA is the quantum of economic value (or profits) generated by a company in excess of its Cost Of Capital (COC). Overall. the total economic value of the company. the product of the capital employed and the difference between the Return On Capital Employed (ROCE) and the COC. it is a comprehensive financial management system that encompasses a range of functions like capital budgeting. Managing Director. The EVA of 27 Malaysia property companies are computed and analysed during the periods of 1997 through 2006.

eventually. which do not result in an immediate increase in pat. The first liabilities are likely to be costs related to R&D and market development. School of Management. belief that it can invest funds far more efficiently than the market. and if a company does not make a profit. traditional measures of corporate performance argue that since a company's pat is. it can skip paying out dividends. Indeed. The logic? Dividends come out of profits. destroy shareholder value. The basis of diversification is a company's . they are comprehensive measures of corporate performance. Indian Institute of Technology. and produce consistent and definitive results. Assumptions like these constitute a recipe for disaster. 53. Even today.'' However. and non-interest bearing current liabilities-which are an integral part of this sanitisation process. Mumbai: ''EVA has standardised the financial accounting process independent of the balance-sheet approach. A company needs to fix these anomalies if it wishes its implementation of EVA to be effective. Its very architecture ensured that EVA promoted the creation of shareholder value. the number of adjustments that a company will have to make is not as high as 168: the typical company will need to make only between 6 and 11 adjustments. It is a potent financial tool for the continued economic growth of an organisation and all its constituents. in some way. Stern Stewart linked EVA to managerial incentives. Second.: ''These adjustments segregate the financial information and convert the accounting framework into the EVA framework so as to reflect the right value creation. and not notional ones. EVA is superior to other measures of financial and corporate performance Traditional measures of corporate performance assume that there is no charge on equity. often mistaken. Korgaonker. 29. In contrast. or economic figures. but to create a 52 . The objective is to ensure that the accounting numbers used by a company in the EVA process are real. To align managerial initiative with shareholder expectations. meant for its shareholders (part of it is doled out as dividend. shareholder-funds are available for free. R&D expenditure. the EVA process requires that expenses like R&D and market development be capitalised over a 5-year period. these measures encourage the company's managers to take decisions that will boost the bottomline. This approach will inhibit growth and. Avers Chaith Kondragunta. the company believes that the very essence of getting managers to do what is best for the shareholders is to not just offer stock-options. However. and not growth that came at the expense of shareholder funds.accounting adjustments-including the amortisation of goodwill. motivate the right behaviour. interest payments. Shareholders expect at least a market rate of return when they buy a company's shares. ICICI Chair Professor and Head.'' This approach ensures that growth isn't sacrificed at the altar of short-term results. Thus. EVA was created by Joel Stern and Bennet Stewart in the wake of the reckless spree of diversification that most large companies in the US and Europe embarked on in the late 1970s and early 1980s. Vice-President and India Head. Stern Stewart & Co. Points out Mangesh G. and the rest is retained to fund future growth).

but on its impact on EVA. And the US-based Oppenheimer Capital only invests in those companies that use EVA. COC. The catch? Whether this rate is lower or higher than the company's cost of capital is irrelevant. Thus. and EVA is an accurate measure of the incremental annual shareholder value generated by a company. An EVAcompany. The Boston Consulting Group: ''EVA is like a corporate nervous system. Two. and decreases if it doesn't. for instance. profits. EVA is the moving force behind the company's existing and new projects. uses EVA as part of the due-diligence process while acquiring other companies. as indicated by the fact that companies don't use EVA. What does this involve? One. not profits. But is EVA a superior measure of corporate performance than higher-order balance-sheetoriented tools like Return On Net Worth (RONW). 35. and accounts receivable. Director and Head of Research.'' It is.deferred incentives-account. consequently. it provides a common platform for us to compare various companies across the globe. Three. Implementing EVA is a 4-step process. the p-e ratio. is a company that is managed the EVA way. a company will choose the strategy that results in the maximum addition of shareholder value. And their managers focus on optimising the COC. or Return On Total Assets (ROTA)? Actually. Concurs Ralph Heuwing. Lafarge. and. therefore. to justify their acts. logistics-major Ryder Systems bases its pricing decisions on EVA. By using EVA to evaluate options. This bestows the financial statements of the company with a dash of reality. Put simply. they implement it. its ability to serve as a critical part of the strategy-process that makes EVA a thoroughbred metric. For instance. All this makes EVA an ideal tool for equity analysis: the HSBC Group. perhaps. yes. however. will increase only if its products and projects generate a rate of return higher than its cost of capital. not at its impact on EPS. VicePresident and Director. It enables the organisation to evaluate its decisions through a strategic lens. Stern-Stewart calls 53 . The amount in the account increases if the company manages to add incremental EVA. ROCE. every individual and department in the company should look. inventory. Explains Vasudeo Joshi. Implementation of EVA A lot. HSBC India Securities: ''Since EVA standardises financial information. A company's EVA. and Net Operating Profits. the French cement transnational. the entire financial reporting of the company is based on the EVA methodology. the primary objective of the company is the enhancement of EVA. Not sales. A company's RONW is a function of the returns its products and projects manage to generate. The pivotal goal of an organisation is to add shareholder value. The mathematical construct of EVA ensures that those companies trying to optimise it end up optimising sales revenues. but EVA. or RONW.'' Goldman Sachs and Credit Suisse First Boston have instructed their analysts to use EVA while analysing a company. bases its analysis of companies on EVA. Even ROTA isn't as refined as EVA. since it encourages companies to enter product-markets that can boost their sales. And the incentives themselves are disbursed at the end of a pre-ordained time-period. Return On Equity (roe). EVA-companies pursue a course of action only if it results in an incremental EVA. 33.

capital allocation. and Mindset. it aims to make every employee of an organisation an entrepreneur who seeks not just to perform his of her function well. MOTIVATION. The company should be willing to align its management system to the EVA process. 39. and what will destroy it. divesting businesses. A typical company can do it in between 3 and 8 months. at least among those managers who believe their rewards are based on variables beyond their control. MEASUREMENT. which propose to implement EVA across locations. multi-divisional. It does not take long to implement EVA. and goal-setting. and multi-location corporation: it can be implemented in one division as a precursor to a company-wide rollout.'' EVA lends itself to this: it can be measured at the level of each of a company's activities. encourages managers to operate in such a way as to maximise the EVA. EVA offers the flexibility of starting small to the large. All constituents of the organisation need to be taught to focus on one objective: maximising EVA. will find that the process takes 18 to 30 months. CFO. The EVA-based management system is the basis on which the company should take decisions related to the choice of strategy. Like other transformation techniques. using the formula EVA = (ROCE . and profits-based reward systems can be the source of resentment. An EVA-based incentive system. However. Any company that wishes to implement EVA should institutionalise the process of measuring the metric.this the 4m process. not just of the operation they oversee. Management System. Agrees Milind Sarwate. Sales-based incentives reward managers for incremental sales without considering the costs involved. Thus. Marico Industries. But companies like Sony and Siemens. but now plans to take the logical next-step by setting up a EVAbased performance-measurement system: ''Institutionalising EVA is not easy. MANAGEMENT SYSTEM. This measurement should be carried out after carrying out the prescribed accounting adjustments. 54 . MINDSET. M&As. Indeed. regularly. but to do so in a way that will enhance the EVA of the company. Any company that manages to do this will find all its employees speaking the same language. which has been measuring its EVA for the last 3-4 years. The 4 ms are: Measurement. however.COC) x Capital Employed. each one of a company's activities should be aligned to. The key to the successful implementation of EVA lies in integrating it into the company's incentive-plan. But it can best be achieved by using EVA as the variable in the company's performance-appraisal or the flexi-pay process. In effect. Its singular focus leaves no room for ambiguity: it isn't difficult for employees to know just what actions of theirs will create EVA. the effective implementation of EVA necessitates a change in the culture and mindset of the company. but of the company as a whole. Companies should decide to implement EVA only if they are prepared to implement the incentive-plan that goes with it. This plan ensures that the only way in which managers can earn a higher bonus is by creating more value for shareholders. Motivation. EVA is an ideal tool to bring about a transformation in a company's culture. and derived from the company's EVA process.

in one financial year. Equally important. The financial advisory also argues that the real measure of a company's long-term ability to add shareholder value is Market Value Added (MVA). The fourth step is to align the organisation's internal processes-its management.: ''The EVA system puts the brakes on growth only when it is a non-profitable. True. this translates into doing what one does better. helps boost the company's ROCE in the short-term. companies adopting EVA should develop the culture of entrepreneurship among their employees. performance-appraisal. This is the most important stage in the EVA-implementation process: in its absence. EVA is an annual measure: it is the difference between the company's NOPAT and its capital charge. An EVA-linked variablecompensation model ensures that employees focus their efforts on activities that enhance the company's economic value. Managing Partner. This.This also removes the fundamental flaw in most traditional compensation models. MVA is the value added 55 . the company should put in place a system-this could be part of either the organisation's MIS or its ERP-that makes it easy for managers to derive the information they need to calculate EVA. 58. but only if it is growth that can generate returns in the long term. they posit. Stern Stewart & Co. The first requires the company implementing EVA to train as many managers as it deems necessary-this depends on whether the company wishes to implement EVA in one of its divisions or across the organisation-in the theory of EVA. The compensation of the majority of a company's employees is fixed. because bonuses are based on changes in EVA. or doing more of what one does irrespective of whether that adds value to the company as a whole. Thus. and compensation systems-to its ultimate objective of increasing shareholder value. All too often. In fact. In most companies. Three.'' In effect. Experience shows that our clients grow faster than their peers. Second. it holds managers accountable for the long term by putting a portion of their bonuses at risk if there is a subsequent decrease in the company's EVA. and short-term optima. First. managers focus on performing the tasks earmarked for them well. In technical terms. from the company's financial reporting system. in EVA-companies. they have the responsibility of ensuring that their performance translates into an increase in the organisation's ability to add shareholder value. managers will not have the requisite motivation to look beyond the comfort of local. The quantum of this compensation is a function of the employee's ability to perform his or her assigned role. the only way that managers can continually earn large bonuses is by finding ways to profitably grow the business. This is better for shareholders than rewarding managers for any growth regardless of whether it provides returns vis-à-vis the COC. EVA is an annual measure and it does not encourage an emphasis on the short term A standard allegation against EVA is that the excessive focus on ROCE and COC constrains capital growth and promotes short-termism. EVA encourages managers to invest in growth. Counters Joel Stern. argue some of EVA's staunchest critics. From these principles emerges a simple 4-step process that companies can use to implement EVA. EVA promotes growth in 2 ways. it encourages managers to postpone or ignore capital investments that do not generate immediate returns.

and employee-interests could well be this wonder-tool's greatest achievement. Accounting fails to include many different vital sources for decision-making that the Balanced Scorecard provides. develop a new tool. (SSC). Most Indian companies are reluctant to change accounting systems. Mathematically. and exploration. training and development costs for people. and is everything described here. Aligning shareholder-. EVA is a technique that offers an alternative to the traditional accounting way in which corporate performance is measured. such as retailing. SSC has not.by the management to the equity capital and debt entrusted to it by the company's shareholders. including the most recent. developed by Harvard Professor Robert Kaplan and Renaissance Consultant David Norton. For instance. Notional profits could well disappear when adjustments for accounting anomalies are made. accounting writes off all intangible assets-including R&D. We believe that EVA is a comprehensive financial management system. The new generation of EVA tools has been upgraded to include advanced capital budgeting ideas. As Bob Kaplan has said. and writes them 56 . public utilities. which is of critical importance in high-risk investment areas such as the Net and oil and gas exploration. the fact that Stern Stewart insists that the companies it helps implement EVA also implement the EVA-based incentive-compensation or variablecompensation model. The Balanced Scorecard. any management system that encourages the continuous measurement of EVA and rewards sustained improvement encourages the employees to add shareholder value. Are you working on any performance. And two. But a company that manages to implement EVA will find that its employees acquire an unrelenting focus on shareholder value. One. we have improved EVA. If EVA has been around for 18 years. EVA measures the true economic value of an enterprise that accounting omits. and insurance companies. Managers are loath to set in motion something that could affect their own earnings.and extraction-intensive industries-including oil and gas. why have a mere 300 companies across the world. Real Options. Does the Balanced Scorecard have a role to play in EVA-luating a company? There is no reason why companies should not adopt the Balanced Scorecard and EVA at the same time. we have developed special applications for industries with unique characteristics. Thus. both EVA and the Balanced Scorecard are the result of shortcomings in the basic concepts of accounting. the MVA of a company is the Net Present Value (NPV) of all its future EVAs. Mr Stern. advertising and promotion. adopted it? One reason could be the accounting-rigour the implementation of EVA demands. and accounting goodwill-in the current year. is another technique that does something similar. In contrast. and only NIIT in India. But there are 2 things that we have worked on.management metric that is fundamentally different from EVA? What can this metric do that EVA can't? A. Another. It is now 18 years since the concept of EVA (Economic Value Added) was originated by Stern Stewart & Co. and does not plan to. banks. Welcome back to India. EVA capitalises the entire amount spent under these heads.

However. the financial advisory EVA can be best applied. This is the key driver of its success.off only over their expected economic useful life.. as The ideal company to implement EVA is one in which the board well as the University of Witwatersrand. Age: 58 years Education: Graduate in economics and finance from the University of Chicago What are the other variables that have an impact on EVA? For instance. US. As for the industry-type. decisions that photography BT INTERVIEWED HIM BECAUSE: He created the 57 true metric of corporate performance: EVA . Measuring Corporate Performance EVA is. Adjunct particular stage in the organisational life-cycle when EVA works best? Or does it suit one industry-type more than the Professor at the Graduate other? Schools of Business at the Fordham University and the Columbia University. President. the failure of the Japanese model has encouraged managers to look for a way out. INTERESTS: Reading books. And the THE PERSON acceptance of EVA by companies in South Asia seems to Name: Joel Stern suggest that a properly-designed EVA implementation programme works in Asian cultures. and align the interests of the management and shareholders. South Africa of directors and the senior management want to improve the POSITIONS HELD: efficiency of a firm. The management Analytical Methods In Financial Planning. over the last 5 years. However. there is no particular stage in a firm's life-cycle when Policy. even in non-diversified businesses. Is there a geographical or cultural context to implementing EVA? Is it easy in some countries and cultures and difficult in others? How do you handle these cultural variations? There is no question that implementing EVA is easiest in the Anglo-Saxon world. The Balanced Scorecard and EVA are highly complementary. and EVA has made breakthroughs in this cultural environment too. best calculated at the level of a business unit. probably. take advantage of opportunities quickly. as well as in Bank the maturity and decline phases. in parts of the world where this type of culture is absent-France. Stern can be implemented with the least trouble? And is there a Stewart & Co. the industry is far less BOOKS AUTHORED: important than the attitude of the management. where companies grow rapidly. Chase Financial However. must want the benefits of EVA. what are the characteristics of a company where EVA DESIGNATIONS: Founder & Managing Partner. where issues related to motivation and rewards encourage a pay-for-performance attitude. Germany. It works well in both the introductory arm of Chase Manhattan and growth phases. where some companies seem to lose their way. and are not in conflict. and Japan come immediately to mind-implementing EVA can be difficult. However.

a portion of exceptional rewards are held back for later payment. is to maximise the EVA of the corporation as a whole. If the EVA of the division or operation they are in charge of fails to improve. after all. EVA bonus systems do this by giving employees an ownership-stake in improvements in the EVA of their divisions or operations. it would be possible to identify decisions that maximise EVA. Does EVA become part of the strategy process in such a case? We like to say that EVA is an agnostic in the area of strategy. of course. For individual business units. That is. However.. The EVA framework we use results in the reduction of friction between units. How does EVA fit in with the concept of corporate governance? Both. EVA has the ability to punish a non-performing organisation by failing to reward it. of course.. like EVA or ABC. and can help the management select the one that will best serve shareholders. Equally important.have a bearing on the unit's profitability are rarely taken at that level. EVA bonus plans are effective because they give managers and workers a stake in improving EVA. how will EVA account for synergies between business units? The goal. incentives based on the EVA of the total enterprise are the most appropriate at the corporate level. and are at risk if EVA fails 58 . EVA does have an extremely important role in strategy formation: it is used to assess the likely impact of competing strategies on shareholder wealth. they receive no reward. This causes employees to behave like owners. If the impact of a particular decision on the EVA of a company were known. are focused on shareholder value. best that a portion of all bonuses be based on aggregate EVA to discourage the individual units from pursuing courses that enhance their own EVAs. often. things are worse. To offer a simple example. The important question is whether a company has an effective governance system. one that properly allocates decision rights and imbues managers and workers with a sense of ownership in the outcome of the decisions they take. but detract from the EVA of the whole. For this reason. Is there a new stream of management-thinking emerging where metric-oriented tools. SSC also has the expertise to craft proper transfer-pricing solutions that recognise the synergies between business units. In a diversified business. EVA can be particularly effective in this regard when it is augmented by new tools such as Real Options analysis. is a set of choices or decisions. captures the net impact of a decision on the EVAs of the various units. essentially. and reduces or eliminates the need for outside interference in decision-making. naturally. it is. All companies have some form of corporate governance. and not of any one business unit. aid a company's strategy process? Strategy. The EVA of the total enterprise. it does not dictate one course of strategy or another. EVA and EVA-incentives provide this type of internal governance.

normally. Even with the best acquisitions.subsequently. we keep goodwill on the balance-sheet forever instead of gradually amortising it. not expenses. 59 . it is to properly reward success. Outlays for these activities are capitalised and amortised over appropriate periods of time instead of immediately deducting them from profits. Since bonusplans are based on EVA. But only one Indian company has actually implemented EVA. and treats them as such. What happens when an EVA company acquires or merges with another company? What distortions are created by this M&A acti-vity. Why is this so? Most companies have failed to adopt EVA. quick to adopt management tools. in many instances. and how should they be handled? The ideal approach is to start by accounting for the full cost of purchase. the EVA system has a memory of what is promised. such as R&D and brand-building activities. This encourages managers to spend the appropriate amount in these areas while still holding them accountable for the eventual results. however. Accordingly. However. and require a recalibration of the incentive-system. EVA recognises that these are investments. However. as accountants do. eventually. A handful do so because they recognise that it is the best course. In the case of other intangibles. Thus. delivered 2 to 3 years later. Is the EVA way of dealing with assets like brands and goodwill superior to the accounting way? EVA deals with goodwill by recognising that it is an investment on which managers must earn a minimum rate of return. However. and still others change because they are in trouble. the successes of those that have adopted EVA will convince others that they must do so to compete effectively tomorrow. short-term gaming disappears. and what is. Even globally. the fall in EVA is radical in the first 2-3 years. it is in the management's interest to make the company EVA positive. A company's acquisition doesn't have to generate positive EVA from Day 1. The company. because their managers are reluctant to adopt sweeping change. Indian CEOs are. has some leeway in consolidating the acquisition. we learn that only 365 companies that have implemented EVA over 18 years. The role of intangible assets is critical in today's context. in India or elsewhere. the key to wealth-creation is not punishing failure. and whatever goodwill is acquired. thus. in the books of the company. acquisitions change the company's future-outlook in terms of EVA. Over time.

or greater than the cost of capital. outlook. it will not change the behaviour of managers and workers-if it is not embraced enthusiastically by the CEO. research is a art of scientific investigation.. rather than an entrepreneurial. 3. This is better for shareholders than rewarding managers for any growth. In fact. and one that. And because bonuses are based on EVA. it will fail when managers have a bureaucratic.. And. seems plausible to those not fully educated in the EVA system. It will fail if it is not used as the basis of incentive compensation. finally. unfortunately. some people contend that it encourages the managers to focus only on the short term. regardless of whether it provides returns that are less than.one can also define research as a scientific and systematic search for pertinent information on a specific topic.1 RESEARCH METHODOLOGY Research in common practice refers to a search for knowledge . When can an EVA initiative fail in an organisation? EVA will fail-that is. Research is an original contribution to the existing stock of knowledge making for its advancement. This is a popular charge by our competitors.Since EVA is an annual measure. Research is the process of systematic and in depth 60 . if you pay managers for something else. the only way managers can continually earn large bonuses is by finding ways to profitably grow the business. The EVA system puts brakes on growth only when it is non-profitable. they will not strive to increase EVA. and ignore the long-term repercussions of their decisions.

segment. Research methodology is a way to systematically solve the research problem. Selecting the sample. the researcher must be able to define clearly. Formulating the objective of the study. It involves a lot of factors like research design.the research design is the conceptual structure within which research is conducted. The design in such studies must be rigid and not flexible and must focus attention on the following: a. In diagnostic studies. compilation. it constitutes the blue print for the collection. what he wants to measure and must find adequate methods for measuring it along with a clear cut definition of ‘Population’ he wants to study. c. backed by collection. measurement and analysis of data.study or search for any particular topic. It may be understood as a science of studying how research is done scientifically. subject or area of investigation. As such the design includes an outline of what the researcher will do from writing the hypothesis and its operational implications to the final analysis of data. techniques of sampling. Methodology as the name suggests methods through which the problem or situation is tackled. Designing the method of data collection. ANALYTICAL RESEARCH DIAGNOSTIC RESEARCH STUDIES: The studies concerning whether certain variables associated are of diagnostic research studies. b. In fact. sample size. 61 . RESEARCH DESIGN: “A Research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure”. presentation and interpretation of relevant details or data. tools used etc all these factors put together brings out a clear and accurate result.

newspapers. What were the sources of data? c. 62 . SECONDARY DATA : Secondary data consists of information that already exist. f. government agencies. Reliability of data: The reliability can be tested by finding of such things about the said data: a.Hence.Suitability of data: The data that are suitable for one enquiry may not necessarily be found suitable in another enquiry. SAMPLING DESIGN DATA COLLECTION METHOD The study is conducted by collecting information from the secondary data. COLLECTION OF SECONDARY DATA: By way of caution.they should not be used by the researcher. before using secondary data. Collecting the data. trade journals and white papers. Were they collected by using proper methods? d. monitoring industry news and developments. Processing and analyzing the data.d. which has been sourced from various authentic and reliable sources like books. Who collected the data? b. At what time were they collected? 2. must see that they possess the following characteristics: 1. trade associations. e.if the available data are found to be unsuitable. the researcher. industry portals. Reporting the findings.

3.Adequacy of data: If the level of accuracy in data is found inadequate for the purpose of present enquiry,they will be considered as inadequate and should not be used by the researcher. SELECTION OF APPROPRIATE METHOD FOR DATA COLLECTION: 1.Nature, Scope and Object of enquiry: This constitutes the most important factor affecting the choice of particular method.The method selected should be such that it suits the type of enquiry that is to be conducted by the researcher. 2.Time factor: availability of time has also to be taken into account in deciding the particular method of data collection.some methods take relatively more time,whereas with others the data can be collected in comparatively shorter duration. 3.Precision required: Precision required is yet another important factor to be considered at the time of selecting the method of collection of data. Dr.A.L.Bowley’s remark in this context is very appropriate when he says that “In collection of statistical data common-sense is the chief requisite and experience the chief teacher”. PERIOD OF THE STUDY The study is done for the period of four months . ANALYSIS AND INTERPRETATION: After collecting research data, it is necessary to analyze and interpret them. The purpose of analysis is to build up a sort of empirical model where relationships are carefully brought out so that some meaningful inferences can be drawn. Data has to be analyzed with reference to the objectives of the study.

EVA CALCULATION 1. Economic capital =


Shareholder’s equity 9 + + + good will written off Capitalized cumulative unusual loss Deferred tax +minority interest +total debt

2. Net operating profit after tax (NOPAT) = Operating profit + _ _ interest expense unusual gain taxes

3. weighted average cost of capital(WACC) Cost of equity Cost of debt WACC = (average out) 4. EVA = NOPAT- (capital×WACC)

The chi-square test a fairly, simple and definitely the most popular of all the other tools, the chi-square test is most widely used non-parametric tests in statistical work. It makes no assumption about being sampled. The quantity chi-square describes the magnitude of discrepancy between theory and observation.

 ( Oi − E i ) 2  χ = ∑  i =1    Ei 

Where Oi refers to observed frequency


Ei refers to expected frequency N = No. of samples

The concept of correlation which is one of the methods of studying the relationship between variables. Two variables may have a positive correlation, a negative correlation or they may be uncorrelated. The correlation between two variables is called as simple correlation.


Ν∑ Χ 2 − ( ∑ Χ)

Ν∑ Χ Υ − ( ∑ Χ)( ∑ Υ )

Ν∑ Υ 2 − ( ∑ Υ )



The term cycle refers to the recurrent variation in time series that usually lost longer than a year and are regular neither in amplitude nor in length. Cyclical fluctuations are long term movements that represent consistently recurring rises and declines in activity. A business cycle consists of the recurrence of the up and down movement of business activity from some sort of statistical trend or “normal”. There are four well-defined periods or phases in the business cycle, namely 1) prosperity 2) decline 3) depression 4) improvement The study of cyclical variation is extremely useful in framing suitable policies for stabilizing the level of business activity that is for avoiding periods of booms and depressions as both are bad for an economy- particularly depression which brings about a complete disaster and shatters the company.

TABLE NO: 3.2.1


5 18.58 1.54 24.5 1.19 23.75 1.96 0 0 2.8 1.3 NON OPERATING INCOME interest income Less: tax on non operating income adjusted non operating income deferred tax on VRS NOPAT 2.2.17 1.2 TABLE SHOWING CALCULATION OF NOPAT FOR THE YEAR ENDED 2005-2006 FOR A PARTICULAR DIVISION OF BHEL (PSSR) 66 .TABLE SHOWING CALCULATION OF NOPAT FOR THE YEAR ENDED 2004-2005 FOR A PARTICULAR DIVISION OF BHEL (PSSR) NOPAT= profit after tax+ interest cost (adj. for taxes)-non operating income PARTICULARS PROFIT BEFORE TAX Less: income tax@ PROFIT AFTER TAX INTEREST COST Less: tax on interest adjusted interested cost DRE charged off less: 1/5 th of VRS benefit adjusted extra-ordinary items RS(IN CRORES) 43.49 Source: collected and compiled from the records and annual reports of BHEL TABLE NO: 3.

NOPAT= profit after tax+ interest cost(adj.34 Source: collected and compiled from the records and annual reports of BHEL NOPAT= profit after tax+ adjusted interested cost+ adjusted extraordinary items.56 NON OPERATING INCOME interest income Less: tax on non operating income adjusted non operating income deferred tax on VRS NOPAT 6.66 27.95 9.14 2.3 TABLE SHOWING CALCULATION OF NOPAT FOR THE YEAR ENDED 2006-2007 FOR A PARTICULAR DIVISION OF BHEL (PSSR) 67 .2.29 0 0 7.41 3.58 4.adjusted non operating income +exchange variation-deferred tax on VRS.02 2.1 25. TABLE NO: 3. for taxes)-non operating income PARTICULARS PROFIT BEFORE TAX Less: income tax@ PROFIT AFTER TAX INTEREST COST Less: tax on interest adjusted interested cost DRE charged off Less: 1/5 th of VRS benefit adjusted extra-ordinary items RS(IN CRORES) 36.61 3.

19 6.45 0. for taxes)-non operating income PARTICULARS PROFIT BEFORE TAX Less: income tax@ PROFIT AFTER TAX INTEREST COST Less: tax on intersest adjusted interested cost DRE charged off less: 1/5 th of VRS benefit adjusted extra-ordinary items RS(IN CRORES) 16.68 0 0 2.51 9.73 6.4 TABLE SHOWING CALCULATION OF NOPAT FOR THE YEAR ENDED 2007-2008 FOR A PARTICULAR DIVISION OF BHEL (PSSR) 68 .94 1.58 -2.NOPAT= profit after tax+ interest cost(adj.86 Source: collected and compiled from the records and annual reports of BHEL TABLE NO: 3.27 -0.18 3.2.58 NON OPERATING INCOME interest income Less: tax on non operating income adjusted non operating income EXCHANGE VARIATION deferred tax on VRS NOPAT 10.

98 0 0 1.NOPAT= profit after tax+ interest cost(adj.43 27. for taxes)-non operating income PARTICULARS PROFIT BEFORE TAX Less: income tax@ PROFIT AFTER TAX INTEREST COST Less: tax on interest adjusted interested cost DRE charged off Less: 1/5 th of VRS benefit adjusted extra-ordinary items RS(IN CRORES) 58.2.08 NON OPERATING INCOME interest income Less: tax on non operating income adjusted non operating income EXCHANGE VARIATION deferred tax on VRS NOPAT 10.92 23.08 -1.5 TABLE SHOWING CALCULATION OF NOPAT FOR THE YEAR ENDED 2008-2009 FOR A PARTICULAR DIVISION OF BHEL (PSSR) 69 .2 6.97 Source: collected and compiled from the records and annual reports of BHEL TABLE NO: 3.56 4.94 34.36 0 -0.

55 Source: collected and compiled from the records and annual reports of BHEL TABLE NO: 3.64 -5. for taxes)-non operating income PARTICULARS PROFIT BEFORE TAX Less: income tax@ PROFIT AFTER TAX INTEREST COST Less:tax on intersest adjusted interested cost DRE charged off Less: 1/5 th of VRS benefit adjusted extra-ordinary items RS(IN CRORES) 109.96 -17.08 NON OPERATING INCOME interest income Less:tax on non operating income adjusted non operating income EXCHANGE VARIATION deferred tax on VRS NOPAT 0 0 0 0 -0.08 -1.37 59.7 1.14 71.NOPAT= profit after tax+ interest cost(adj.1 37.6 TABLE SHOWING CALCULATION OF NOPAT FOR THE YEAR ENDED 2009-2010 FOR A PARTICULAR DIVISION OF BHEL (PSSR) 70 .94 -11.2.

32 62.49 -20.92 Source: collected and compiled from the records and annual reports of BHEL TABLE NO: 3.38 0 0 NON OPERATING INCOME interest income Less:tax on non operating income adjusted non operating income EXCHANGE VARIATION deferred tax on VRS NOPAT 0 0 0 0 0 41.62 33.NOPAT= profit after tax+ interest cost(adj.7 TABLE SHOWING CALCULATION OF EVA FOR A PARTICULAR DIVISION OF BHEL (PSSR) 71 .87 -10.3 -30.2. for taxes)-non operating income PARTICULARS PROFIT BEFORE TAX Less: income tax@ PROFIT AFTER TAX INTEREST COST Less:tax on intersest adjusted interested cost DRE charged off Less: 1/5 th of VRS benefit adjusted extra-ordinary items RS(IN CRORES) 95.

19552 8 2007-08 34.00% 73.14 12. for the year ended 2006-07 it is 9.96 59.06% 20.32% 39.32% 28.2. for the year ended 2005-06 it is 28.82.5530 6 2006-07 9. NOPAT and capital employed YEAR PAT NOPAT CAPITAL EMPLOYED WACC EVA 2004-05 24.(capital employed×WACC) EVA is calculated by substituting the value for WACC.8199 2 2005-06 27.EVA = NOPAT. for the year ended 2008-09 it is 73.56.55 -96.4 12.00% 43.97 -94.3578 FINDINGS From the above table it is found out that EVA for a particular division of BHEL (PSSR) for the year ended 2004-05 is 20.29 25.96 23.1 72 .123 2009-10 62. FIGURE NO: 3.95 14.27 -63.98 27.64% 9.02 11.34 -26.68 1.08 12. for the year ended 2009-10 it is 43. INFERENCE It is inferred that EVA for a particular division of BHEL (PSSR) is maximum for the year ended 2008-09 and EVA is minimum for the year 2006- 8 2008-09 71.92 -10.49 22.3 41. for the year ended 2007-08 it is 39.

86 9.55 73.6000 8 2008-09 59. for the year ended 2009-10 it is 41.34 28.2.5530 6 2006-07 1.49 20.92 43. INFERENCE It is inferred that EVA for the year 2006-2007 is the least among the years since NOPAT for the year is the least.8199 2 2005-06 25. 73 .34.GRAPH SHOWING EVA FOR A PARTICULAR DIVISION OF BHEL 80 70 60 50 40 30 20 10 0 2005 2006 2007 YEAR 2008 2009 2010 EVA TABLE NO: 3.8 A COMPARATIVE STUDY BETWEEN EVA AND NOPAT YEAR NOPAT EVA 2004-05 23.123 2009-10 41. NOPAT for the year ended 2005-06 is 25.50. for the year ended 2008-09 it is 59. for the year ended 2006-07 it is 1. for the year ended 2007-08 it is 27.86.97 39. .19552 8 2007-08 27.92.3578 FINDINGS It is find out that the net operating profit after taxes (NOPAT) for the year 2004-05 is 23.97.55.

95.08 28. for the year ended 2009-2010 it is - 43.4 FINDINGS: It is find out that capital employed for the year ended 2004-2005 is 22.8199 2 2005-06 -26.5530 6 2006-07 -63.40.FIGURE NO: 3.9 A COMPARATIVE STUDY BETWEEN CAPITAL EMPLOYED AND EVA YEAR CAPITAL EMPLOYED EVA 2004-05 22. 74 . INFERENCE: It is inferred that capital employed for the year 2006-2007 is the least over the period and as the capital employed decreases EVA increases.2 TABLE NO: 3.6000 8 2008-09 -96.02 9.. for the year ended 2007-2008 it is -94. for the year ended 2008-2009 it is -96.95 73.123 2009-10 -10.14 20.08. for the year ended 2005-2006 it is -26. for the year ended 2006-2007 it is -63.2.19552 8 2007-08 -94.

3578 FINDINGS: It is find out that profit after tax (PAT) for the year ended 2004-05 is 24.68 9.96 73. for the year ended 2005-2006 it is A COMPARATIVE STUDY BETWEEN PAT AND EVA YEAR PAT EVA 2004-05 24.98. for the year ended 2009-2010 it is 62. for the year ended 2007-2008 it is 34. for the year ended 2006-2007 it is 9.55306 2006-07 9. for the year ended 2008-2009 it is 71.68.3 TABLE NO: 2007-08 34.98 39.123 2009-10 28.FIGURE NO: 3.3 43.96 20. 75 .60008 2008-09 71.81992 2005-06 27.

49 2005-06 -26.95 73.55 2009-10 -10.02 9.60008 27.97 2008-09 -96.14 20.11 A COMPARATIVE STUDY BETWEEN EVA.86 2007-08 -94.195528 1.81992 23.55306 25.2.4 TABLE NO: 3.08 28.2. Capital employed for the year ended 2007-09 is 76 .4 39.34 2006-07 -63.92 FINDINGS It is found out that for the year ended 2006-07 EVA reaches its minimum figure since net operating profit after taxes is minimum.INFERENCE: It is inferred that PAT for the year 2006-2007 is the least over the period and hence EVA for the year is also found to be low.123 59. FIGURE NO: 3.27 43.3578 41. CAPITAL EMPLOYED AND NOPAT YEAR CAPITAL EMPLOYED EVA NOPAT 2004-05 22.

INFERENCE From the above graph it is inferred that as the capital employed decreases for a particular year n EVA reaches its maximum figure.5 TABLE NO: 3. FIGURE NO: 3.2.2.minimum but EVA reaches its maximum figure since net operating profit after taxes for the year is maximum.12 TABLE SHOWING CALCULATION OF CORRELATION COEFFICIENT BETWEEN NOPAT AND EVA Let X=NOPAT Y=EVA 77 .

65 XY 489.97 59.X 23.65 ∑XY=8509.67 84.12 3. ∑X2=7283. It is found out that correlation coefficient between NOPAT and EVA is +0.29 ∑X2=7283.47 815.36 ∑Y=214.41 X2 551.49 25.12 43.16 5346.92 ∑X=180. ∑Y2=10128.60 73.78 642.06 723.17.71 17.46 1568.19 39.41 .53 1880.13 TABLE SHOWING CALCULATION OF CORRELATION COEFFICIENT BETWEEN CAPITAL EMPLOYED AND EVA Let X= CAPITAL EMPLOYED Y=EVA X Y XY 78 X2 Y2 .475 Conclusion: By calculating correlation coefficient between NOPAT and EVA it is found that these two factors are positively correlated.2.09 1107.55 41.17 Y2 433.61 4354. ∑Y=214.29 1817.38 r= n ∑xy − ∑x ∑ y n ∑ x − (∑x ) 2 n∑ y − (∑ y ) 2 2 2 ∑XY=8509.13.86 27.56 9.46 782.13 Y 20.475 TABLE NO: 3.32 3546.82 28.34 1.09 ∑Y2=10128. ∑X=180.20 1757.65.38 Substituting the value in the above equation r=0.

∑Y2=10128.47 815.36 9399.27 ∑X=-268.02 -94.99 433.58.99. ∑XY=-12135.57.14 -26.08 -63.46 1568.475 Conclusion: By calculating correlation coefficient between capital employed and EVA it is found that these two factors are negatively correlated.19 39.52 8911. ∑Y=214.53 1880.38 ∑X2=23557.15 -3738.36 ∑Y=214.12 43.82 28.475 TABLE NO: 3.56 9.24 -7088. Substituting the value in the above equation r=-0.31 ∑XY=-12135.40 -96.57 490.65.2.95 -744.16 5346.47 ∑X2=23557.65 460.22.14 TABLE SHOWING CALCULATION OF CORRELATION COEFFICIENT BETWEEN WACC AND EVA Let X= WACC Y=EVA X Y XY X2 Y2 79 .60 73. It is found out that correlation coefficient between CAPITAL EMPLOYED and EVA is -0.30 105.84 -579.16 3971.98 -445.09 ∑Y2=10128.67 84.38 r= n ∑xy − ∑x ∑ y n ∑ x − (∑x ) 2 n∑ y − (∑ y ) 2 2 2 ∑X=-268.58 20.95 -10.18 680.

53 1880.12 43.2.15 TABLE SHOWING CYCLICAL VARIATION FOR EVA CYCLICAL VARIATION (RELATIVE RESIDUAL METHOD) 80 .16 5346.64 12.86 106.65 251.49 433.09 351.06 12. TABLE NO: 3.78 135.44 151. ∑Y=214.00 14.46 1568. It is found out that correlation coefficient between WACC and EVA is 145.19 39.32 11.97 487.09 ∑Y2=10128.864.12. Substituting the value in the above equation r=0.864 Conclusion: By calculating correlation coefficient between WACC and EVA it is found that these two factors are positively correlated.38 r= n ∑xy − ∑x ∑ y n ∑ x − (∑x ) 2 n∑ y − (∑ y ) 2 2 2 ∑X=-76.36 ∑Y=214.04 ∑XY=2828. ∑XY=2828.82 28.68 607.00 ∑X= ∑X2=976.32 14.56 9.60 73.47 815. ∑Y2=10128.78 196 196 ∑X2=976.34 20.49 151.67 84.87 1023.

83 39.95x Conclusion: Cyclical variation for EVA is calculated over the period by relative residual method and it is found out that the largest fluctuation occurs in the year 2005.X x Y XY X2 Y ∧ Y/ Y ∧ *100 Y- Y ∧ / Y 2005 2006 2007 2008 2009 2010 -5 -3 -1 1 3 5 ∑X=0 20.82 28.73 47.60 73.52 -21.53 129.13 -0.60 219.36 216.88 19.67 153.8 ∑XY=276.78 b=3.65 -104.19 39.68 -9.88 119.78+3.6 81 .2.36 ∑Y=214.52 78.03 23.19 39.35 -71. FIGURE NO: 3.12 43.95 Y =35.09 *100 29.35 28.56 9.1 -85.63 55.91 ∧ Y ∧ ∧ =a+bx b=∑xy/∑x2 a=∑y/n a=35.33 53.79 25 9 1 1 9 25 ∑X2=70 16.93 31.87 99.


21 104.00 €Y=76.42 25 9 1 1 9 25 €X2=70 11.34 -60.32 42 70 €XY=15.63 101.38 13.22 a=∑y/n Y =12.32 14.30 Y =a+bx a=12.22x Conclusion: Cyclical variation for WACC is calculated over the period by relative residual method and it is found out that the largest fluctuation occurs in the year 2005.32 11.82 103.12 95.64 12.62 12. FIGURE NO: 3.16 -6.30 3.72+0.5 12.79 4.64 12.79 2.88 -4.2.X x Y XY X2 Y ∧ Y/ 0 Y ∧ *10 Y- Y/ Y ∧ ∧ *100 2005 2006 2007 2008 2009 2010 -5 -3 -1 1 3 5 €X=0 12.06 12.96 -11.3 -36.79 102.16 93.63 1.7 83 .06 12.00 14.94 13.72 ∧ ∧ b=∑xy/∑x2 b=0.


7 25 78.4 1 -290.CYCLICAL VARIATION (RELATIVE RESIDUAL METHOD) X x Y XY X2 Y ∧ Y/ 0 Y ∧ *10 Y- Y/ ∧ Y *100 2005 2006 2007 2008 2009 2010 ∧ -5 -3 -1 1 3 5 ∑X=0 22.62 149.62 49.08 -63.96 -296.46 -196.58 -110.86 -51.06 -11.70 b=∑xy/∑x2 a=∑y/n a=-44.66 -38.48 80.26 -64.95 -10.06 -78.48 19.58 120.76 65.14 -26.63 105.∑X2=70 469.27 ∑Y=268.70x Conclusion: Cyclical variation for CAPITAL EMPLOYED is calculated over the period by relative residual method and it is found out that the largest fluctuation occurs in the year 2003.40 -96.26 -24.62 5.76-6.58 20.04 Y ∧ ∧ =a+bx b=-6.76 Y =-44. 85 .35 25 ∑XY=.02 1 -94.76 165.02 -94.85 9 -51.24 9 63.

FIGURE NO: 3.2.8


H0: EVA is evenly distributed evenly throughout all the years. H1: EVA is not distributed evenly throughout all the years.

Ei =




214 .65 ==35.78 6

OI 20.82 28.56 9.19 39.60 73.12 43.36

EI 35.78 35.78 35.78 35.78 35.78 35.78

(OI-EI)2 223.8 52.13 707.03 14.59 1394.28 57.46

(OI-EI)2/EI 6.25 1.46 19.76 0.41 38.97 1.61


2 cal





(Oi − Ei ) 2 = ∑ Ei i =1

cal 2 0.05

=68.46 With (n-1) degrees of freedom =5df =11.1


2 cal



2 0.05

At 5%, level of significance with (n-1) df , χ 2 0.05 with (n-1) df = (6-1) df = 5df = 11.1 The Calculated value is greater than table value, i.e.) χ 2 cal = 68.46 > χ 2 table = 11.1 Hence, H0 is rejected.

By the method of chi-square it is concluded that EVA is not distributed uniformly throughout all the years since H0 is rejected.



H0: capital employed is evenly distributed throughout all the years. H1: capital employed is not distributed evenly.

Ei =
OI 22.14




− 268 .58 ==35.78 6

EI -44.76 -44.76 -44.76 -44.76 -44.76 -44.76

(OI-EI)2 4475.61 348.94 333.43 2464.13 2723.79 1189.56

(OI-EI)2/EI -99.9 -77.96 -7.45 -50.05 -60.85 -26.58

-26.08 -63.02 -94.40 -96.95 -10.27


2 cal





(Oi − Ei ) 2 ∑ Ei i =1

2 0.05

with (n-1) degrees of freedom =5df


2 cal



2 0.05

At 5%, level of significance with (n-1) df , χ 2 0.05 with (n-1) df = (6-1) df = 5df = 11.1 The Calculated value is greater than table value, i.e.) χ 2 cal = -322.79 < χ 2 table = 11.1 Hence, H0 is accepted.

By the method of chi-square it is concluded that Capital employed is distributed uniformly since H0 is accepted.

TABLE NO: 3.2.20


Conclusion: By the method of chi-square it is concluded that WACC is not distributed uniformly since H0 is rejected.72 12.72 12. level of significance with (n-1) df .17 0.44 0.64 (OI-EI)2/EI 0.72 12.72 12.72 (OI-EI)2 0.06 12.34 ==12.32 11.4 > χ 2 table = 11.72 6 EI 12.01 0.00 14.05 At 5%.03 0.00 ∑O n i = 76 .16 1.16 1.) χ 2 cal = 0.e.72 12. Ei = OI 12.1 The Calculated value is greater than table value.05 with (n-1) df = (6-1) df = 5df = 11.4 χ χ χ 2 (Oi − Ei ) 2 = ∑ Ei i =1 n 2 0.1 2 cal > χ 2 0.01 0.13 χ 2 cal = 0.CHI-SQUARE TEST-CALCULATION: WACC H0: WACC is evenly distributed throughout all the years. H0 is rejected. H1: WACC is not distributed evenly. i.1 Hence.09 0.13 0.64 12. 89 .64 1.32 14. χ 2 0.05 with (n-1) degrees of freedom =5df =11.

It is found out that correlation coefficient between WACC and EVA is 0.2. 90 .35 respectively. • Cyclical variation for EVA is calculated over the period by relative residual method and it is found out that the largest fluctuation occurs in the year 2007 and the value is -71.475.02.07-08.12 respectively.3 FINDINGS • EVA is calculated for the year 2004-05.12. It is found out that correlation coefficient between NOPAT and EVA is +0.06-07.82.56. • It is inferred that as the capital employed decreases for a particular year . and 73.09-10 and it is found to be 20. • By calculating correlation coefficient between NOPAT and EVA it is found that these two factors are positively correlated.39.43.60. • By calculating correlation coefficient between capital employed and EVA it is found that these two factors are negatively correlated.net operating profit and EVA increases and reaches its maximum figure of 59. • A comparative study between EVA and NOPAT IS made and it is found out that EVA for the year 2006-2007 is the least among the years since NOPAT for the year is the least and EVA for the year 2006-07 is found to be 9.05-06.13. • It is also found that capital employed for the year 2006-2007 is the least over the period and it is found to be -63. It is found out that correlation coefficient between CAPITAL EMPLOYED and EVA is -0. • It is found that PAT for the year 2006-2007 is the least over the period and it is found to be9.73.475. • By calculating correlation coefficient between WACC and EVA it is found that these two factors are positively correlated.9.08- • Cyclical variation for WACC is calculated over the period by relative residual method and it is found out that the largest fluctuation occurs in the year 2007 and the value is -6.

53.• Cyclical variation for CAPITAL EMPLOYED is calculated over the period by relative residual method and it is found out that the largest fluctuation occurs in the year 2005 and the value is -296.82. • By the method of chi-square it is concluded that EVA is not distributed uniformly throughout all the years since H0 is rejected. • By the method of least square the trend value for EVA is calculated and it is found out that the value increases gradually over the period and it is inferred that EVA for the enterprise increases year by year and is maximum for the year 2007-08 and the trend value is found to be 55. • By the method of chi-square it is concluded that WACC is not distributed uniformly since H0 is rejected.76. • By the method of least square the trend value for WACC is calculated and it is found out that the value increases gradually over the period and it is inferred that WACC for the enterprise increases year by year and is maximum for the year 2007-08 and the trend value is found to be 13. • By the method of least square the trend value for capital employed is calculated and it is found out that the value decreases gradually over the period and it is inferred that capital employed for the enterprise decreases year by year and is minimum for the year 2007-08 and the trend value is found to be -73. 91 . • By the method of chi-square it is concluded that Capital employed is distributed uniformly since H0 is accepted.62.

3. laws and industry characteristics. (2) For the EVA program to succeed. including adjustments and bonus plan.4 SUGGESTIONS Though EVA has some advantages over other performance indicators. (4) Enterprises should disclose full EVA information to investors. it is a post-financial measure. (3) To reveal the true value of a multinational. it must have full backing of the CEO and senior managers. (1) Enterprises need good strategies and value drivers like incentive based EVA to generate good EVA numbers. it should design proper EVA adjustments according to each country’s accounting rules. (5) Enterprises can use Balanced Scorecard and value-reporting tools to support the EVA performance indicator. 92 .

The real reason why a firm's financials might improve after EVA adoption is twofold: 1) the measurement effect. EVA analysis then allows the firm to concentrate on the firm's productivity in order to maximize the value created by the firm.the real missing link between EVA and better financials. In general. hence. and. by definition. or 4) decreased error/defects. For those areas of the firm where the former is indeed greater than the latter. and where it's not. shareholder wealth. When properly applied.is a totally separate matter. and where it's not. What the firm does with this measure . EVA is a very useful tool with which the firm can maximize the value of the firm. More specifically.5 CONCLUSION EVA is simply a measuring tool . EVA does not create value -. EVA is an internal financial tool which holds every manager in the firm accountable for every dollar allotted to them.it simply measures it. EVA can be a powerful tool. From the market's perspective.especially innovation and technology -.combine to accomplish one or more of four outcomes: 1) increased output per work-hour. an increase in the firm's productivity. these factors -. 93 . 3) decreased costs. 2) productivity increases .it might even choose to ignore it . Any of these four outcomes is. maximizing EVA should maximize the firm's share price and. 2) increased quality. it allows a firm to ascertain where it's creating value. which points out where value is being created by the firm. it allows a firm to identify where the return on its capital is outstripping the cost of that capital. In other words. in a rational market. From the firm's perspective.3.

maximizing share price is the name of the game in a free-market economy.Finally. as any good capitalist knows. they automatically bid up and eventually maximize the firm's share price. as investors buy more shares in the firm in order to have more claims on its increased value. And. 94 .

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