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Wealth Maximization

EVA, or Economic Value Added, is a performance metric that measures financial performance based on whether a company earns more than its cost of capital. It was developed and trademarked by Stern Stewart & Co. EVA calculates economic profit by taking a company's net operating profit after taxes and subtracting its cost of capital charge. Components used to calculate EVA include NOPAT, capital, capital charge, and RONA. Market Value Added is a related metric that measures the wealth created for investors by calculating the difference between a company's current market value and the capital contributed by investors. While EVA measures economic profit, MVA measures wealth. EVA is useful for investors and improves book value, while MVA

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Roshni Bhatia
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100 views9 pages

Wealth Maximization

EVA, or Economic Value Added, is a performance metric that measures financial performance based on whether a company earns more than its cost of capital. It was developed and trademarked by Stern Stewart & Co. EVA calculates economic profit by taking a company's net operating profit after taxes and subtracting its cost of capital charge. Components used to calculate EVA include NOPAT, capital, capital charge, and RONA. Market Value Added is a related metric that measures the wealth created for investors by calculating the difference between a company's current market value and the capital contributed by investors. While EVA measures economic profit, MVA measures wealth. EVA is useful for investors and improves book value, while MVA

Uploaded by

Roshni Bhatia
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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WHAT IS EVA?
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Most successful performance metric Popularity is a result of able marketing and

deployment by STERN STEWART, owner of the trademark

EVA is a measure of financial performance based on

the context that all capital has a cost and that earning more than the cost of capital creates value for shareholders.

ECONOMIC VALUE ADDED:


3

Registered trademark of Stern Stewart & Co. of New

York City ( USA) QUEST OF VALUE-Term EVA with a symbol TM as super script was used. EVA is a trademark of Stern Stewart & Co. is a specific method of calculating economic profit. Peter Drucker discussed EVA MANAGING FOR RESULTS Concept was popular after Stern Stewart & Co. marketed it.

UNDERSTANDING EVA AND ITS COMPONENTS


4

COMPONENTS OF EVA:
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NOPAT

CAPITAL

CAPITAL CHARGE

RONA

MARKET VALUE ADDED(MVA)


6

Measure of wealth a company has created for its

investors Cumulative measure of corporate performance Primary objective of co.- Maximizing MVA
MVA = [(Shares outstanding x Stock price) + Market value of

preferred stock + Market value of debt] Total capital

EVA V/S MVA


7

ECONOMIC VALUE ADDED

MARKET VALUE ADDED

Attempts to measure the true economic profit produced by a company Performance metric

Diff between current market value of company & capital contributed by investors. Wealth metric

Useful for investorsdetermine the company value

Improves the book value of the company shares

CONCLUSION
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We can definitely say that EVM has emerged as a

powerful conceptual framework and is practically implemented in most of successful corporations across globe. Which incorporates balance sheet data into an adjusted income statement metric which works best for companies whose tangible assets (assets on the balance sheet) correlate with the market value of assets - as is often the case with mature industrial companies.

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