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Reliance - 1997 In Everything that we do we have only one supreme goal i.e. to maximise your wealth as member of Indias largest investor family.
Tata Steel
Enhancing Shareholder Value Vision 2007 To seize the opportunities of tomorrow and create a future that will make us EVA positive Company. I think the soundest management advise I have heard is the old saying - What gets measured gets done Tom Peters
Background of EVA
New Value based performance measure developed by a New York Consulting firm, Stern Steward & Co in 1982
The object of EVA is to promote valuemaximizing behavior in corporate managers
What is EVA
EVA is single, value based measure that was intended to evaluate
Business strategies
Capital projects Maximizing the long-term shareholders wealth
EVA
Economic Returns
Why EVA
EVA sets managerial performance target and links it to reward system which motivates the managers to behave like owners.
EVA allow managers to have discretion and free range creativity keeping the long term object in mind.
Formulas - EVA
EVA : NOPAT Cost of Capital: Cost of Debt: NOPAT - Cost of Capital (WACC) Net Operating profit after tax Post Tax cost of debt + Cost of Equity Avg. Interest RateX (1-Tax rate) X Avg. borrowed fund
Cost of Equity(Rate): Risk Free Debt Cost + (Market Premium X Beta Variant) Cost of Equity: Market Premium Beta Variant : Equity rate X Equity and Reserves Expected Return from the market - Risk free debt cost Standard Deviation of the script X Co-relation Co-efficient Standard Deviation of the Sensex/ Index
Less than one means that the Security is Less Volatile than the Sensex
Operating Profit
Operating Profit can be calculated in two ways: Accounting concept: Income is measured by deducting expenses incurred to earn the income during that period. Economic Concept: Operating profit considered to be the maximum amount which the business is capable of distributing to its shareholders while still remaining in the same position at the end of the period as it was at the beginning.
EVA TREE
Operating profit
Net of Taxes Cost of capital Employed
Cost of Equity
Average Tangible Net Worth Cost of equity percentage Risk free debt cost Average borrowed fund
Cost of Debt
Post tax cost of debt (percentage)
Market Premium
Beta Variant Standard Deviation of Stock/ script
Concept of EVA
Shareholders Value is created by MAXIMIZING ECONOMIC PROFITS
What it measures
Creating value
The Company which earns Higher Returns (Net Operating Profit After Tax) than the Cost of Capital
ARE CONSIDERED AS
ARE CONSIDERED AS
Financial Planning
Performance Measurement
Capital Budgeting
Incentive Compensation
EPS
ROI
NPV
IRR
ROE
RONA
Goal Setting
Shareholder Communication
Incentive Compensation
Capital Budgeting
EVA
Advantages of EVA
EVA is more than performance management,. It is motivational, compensation based management system that facilities economic activity and accountability at all levels in the firm.
EVA eliminates the GAP in GAAP as 164 adjustments are required to compute the EVA
As compared to historical tools for evaluaiton e.g. ROI, EPS- EVA is better tool to assess the company as it takes into account the cost of capital
Advantages of EVA
EVA covers all aspects of the business cycles
EVA aligns and speeds decision making, and enhances communication and teamwork EVA decouples bonus plans from budgetary targets
Limitations of EVA
EVA does not control for size differences across plants or divisions EVA is based on financial accounting methods that can be manipulated by managers by using different method of accounting.
There are different ways to calculate NOPAT and COC as there are numerous fundamental differences exist with regard to calculation of NOPAT and COC There are 164 adjustment which is really cumbersome exercise EVA may focus on immediate results which diminishes innovation
EVA is biased against new assets EVA is in favour of large companies EVA favours more debt compared to equity It is difficult to implement Implementation includes significant cost EVA does not study business drivers like consumer satisfaction or learning and growth.
Statistical information
Total number of listed companies in India - 7199 (30/11/2005BSE ) Companies implemented EVA - Below 30 (TCS, Infosys, Godrej, Tata Steel, Tata Tea, ITC, MARICO, Aditya Birla Group, Indian Hotels, Dr, Reddys Laboratories, Companies implemented EVA in other countries
US - 80 (Citi Corp., Coca Cola, Bausch & Lomb, Dun & Bradstreet corp., Eli Lilly & Co, US Postal Service etc.) Canada - 6 Europe - 9 Maxico - 4 Brazil - 9 South Africa - 12
Total Companies implemented EVA in world is about 250. The EVA implementation has resulted in better stock valuation.
TCS - EVA is linked to compensation. Godrej - EVA was chosen as strategic management tool.
managers do,
The formula for MVA is: MVA = V- K where: MVA is market value added V is the market value of the firm, including the value of the firm's equity and debt
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MVA is the present value of a series of EVA values. MVA is economically equivalent to the traditional NPV measure of worth for evaluating an after-tax cash flow profile of a project if the cost of capital is used for discounting.
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