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Submitted By mohitkulchandani
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ECONOMIC VALUE ADDED (EVA®) (for personal use only)
Concept
EVA was originally proposed by the consulting firm Stern Stewart & Co., Economic Value Added (EVA) is currently a very popular idea. Fortune Magazine has called it “today’s hottest financial idea and getting hotter” and management guru Peter Drucker refers it to as a measure of total factor productivity. Companies across a broad spectrum of industries and across a wide range of countries have joined the EVA bandwagon. EVA is essentially the surplus left after making an appropriate charge for the capital employed in the business. It may be calculated in any of the following, apparently different but essentially equivalent, ways:

EVA = NOPAT – c* x CAPITAL EVA = CAPITAL (r – c*)
Where, EVA = Economic Value Added
NOPAT = Net operating Profit After Tax c* = Cost of Capital
CAPITAL = Economic book value of the capital employed in the firm r = Return on capital = NOPAT / CAPITAL

The goal of Financial Management is to maximize the shareholders’ value. The shareholders’ wealth is measured by the returns they receive on their investment. Returns are in two parts, first in the form of dividends and the second in the form of capital appreciation reflected in market value shares, of which market value is the dominant part. The share prices are influenced by the extent to which the management is able to meet the expectation of the shareholders. Various measures like the return on capital employed , return on equity, earnings per share, net profit margin, operating profit margin have been used to evaluate the performance of the business. The shareholders require at least a minimum rate of return on their investment depending on the risk in the investment. Sometimes, the industry average or the competitor’s performance may be considered as a benchmark, which may not be

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