...2011 SUBJECT: INTRODUCING EVA Economic Value Added (EVA) is a measurement tool that provides a clear picture of whether a business is creating or destroying shareholder wealth. EVA measures the firm’s ability to earn more than the true cost of capital. EVA combines the concept of residual income with the idea that all capital has a cost, which means that it is a measure of the profit that remains after earning a required rate of return on capital. If a firm’s earnings exceed the true cost of capital it is creating wealth for its shareholders. Especially the key persons (top and middle managers) have to understand and commit to EVA thoroughly, without the full support of managers there will not be substantial results Good understanding helps to tailor EVA to the specific need of a company EVA will be most beneficial if broken down into small parts Integration to incentive systems for all the employees is a good way to make all the employees to work hard for common goals. EVA points managers and firms toward efficiency—essentially a goal of using EVA is to cause the firm to accomplish more with as little capital as necessary. EVA is a method to measure a company´s true profitability and to steer the company correctly from the viewpoint of shareholders EVA helps the operating people to see how they can influence the true profitability (especially if EVA is broken down into parts than can be influenced). EVA improves profitability usually through the...
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...Unit One: Case Study (MIP) Kaplan University – GB519 Measurement and Decision Making March 2010 What is the ROI for MIP based on original estimates? • Operating assets ( development costs were $140 million • Sales ( annual operating income was expected to be approximately $25 million ROI for MIP = 25 million / 140 million = .18% What is the ROI if Richard Lawrence’s new revenue projects are used? • likely generate operating income of just $17.5 million per year ROI for MIP with new figures = 17.5 million / 140 million = .13% Elaine feels pressure to deliver “good news” to Blake. What advice would you give to her? Given the possible personal financial rewards that Elaine may enjoy if GSM goes public, would your advice change? The truth in the figures is exactly what Elaine should be showing to Blake. Although the numbers are less than satisfactory to Blake and his expectations, the numbers are the numbers and should be reported appropriately. It would prove Elaine less than assertive and capable of doing her new job if she sugar coated the news. Managers and executives require solid information in order to make sound decisions. What responsibilities does Elaine have to other GSM employees, the board of directors, and the venture capitalists? Elaine’s duty is to report to Blake. However, this is information that also affects all those involved with the possibility of MIP going public. Because of this, Elaine...
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...International Financial Management Case Analysis of: The Continuing Transformation of Asahi Glass: Implementing EVA TABLE OF CONTENTS * BACKGROUND * CORPORATE GOVERNANCE * FEATURES IN ASIA * MAIN BANK * ORGANIZATIONAL CHANGE * IMPLEMENTING EVA 1. ADVANTAGES 2. DISADVANTAGES * PREFERENCE TO EVA * RECOMMENDATION Background Asahi Glass is an MNC, based in japan. Its products include flat glass, chemicals, and electronics and displays. It was reorganized by “Ishizu”. It captures annual sales of about 1.3 trillion and is considered largest global market leader in most of its product categories. It has almost more than 200 subsidiaries and operates in more than 25 countries. . The company reformed in corporate governance and the new management system for resource allocation and performance measurement is based on economic value added (EVA). In this case our analysis is focused on influence of bank system on corporation, corporate governance reform, difficulties the president faced in reform. Moreover, we also discuss EVA system, its effectiveness and pros and cons. Corporate Governance It is set of mechanism that describes the relationship between board of directors, top management and shareholders, means it takes into account the self-interested controllers of company. It also deals with agency problem. It contains two models: one is ‘control model’; that discusses control from inside boards...
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...Week 5 Assignment from the textbook Nancy Schwartz ACC/400 February 22, 2016 Lee Kroll E25.4 Sapsora Company uses ROI to measure the performance of its operating divisions and to reward division managers. A summary of the annual reports from two divisions is shown below. The company’s weighted-average cost of capital is 12 percent. Note: Economic Value Added (EVA) (p. 1087) A specific type of residual income that is computed by multiplying the after-tax weighted average cost of capital by total assets minus current liabilities and subtracting that product from the after-tax operating income. ------------------------------------------------- Division A Division B Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,000,000 $8,750,000 Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 1,750,000 After-tax operating income . . . . . . . . . . . . . . . . . . 1,000,000 1,180,000 ROI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25% 14% a. Which division is more profitable? Division A b. Would EVA (Economic Value Added) more clearly show the relative contribution of the two divisions to the company as a whole? Show the computations. EVA = After-Tax Operating Income – {Division’s Total – Division’s Current} x Weighted- Assets Liabilities Average Cost of Capital | Division A | Division B | Total Assets | 6,000,000 | 8,750...
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...Quality Metal Service Center Case Analysis Company History Quality Metal Service Center was established in the late 1800s as a local metals distribution center. By 1992, it had grown into a national metal distribution company operating in four geographic regions-each of which contained about six districts. The company had experienced rapid sales growth along with the geographic expansion since the 1920s. In 1991, Quality Metal posted sales in excess of $750 million. In March, 1992, the president and CEO, Edward Brown, questioned the effectiveness of the company’s controls. He stated, “I don’t know if our controls have inhibited managers from pursuing our goals of aggressive growth and above-average return on assets, as compared to the industry…” (Anthony & Govindarajan, 2007, p. 300). Anthony and Govindarajan (2007) indicated in the years leading up to the 1990s, the metal distribution industry was “regarded as a mature, highly competitive, and fragmented industry.” There were, however, within the metal industry some important indicators that could enhance the growth potential of the metal service center sector. Anthony and Govindarajan (2007) identified three trends within the industry. One was the steel mill’s retrenchment. Product lines had been dropped, customer service staff had been reduced and specialty products were eliminated. The second trend included the implementation of a “just-in-time” inventory management system. Metal users reduced costs...
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...FINANCIAL PERFORMANCE MEASURES AND THEIR EFFECTS By Evanti Firstadea (105020307121003) Rosyida Mardyana (105020307121011) University of Brawijaya Economics and Business Faculty Accounting Major FINANCIAL PERFORMANCE MEASURES AND THEIR EFFECTS INTRODUCTION The primary objective of for-profit organizations is to maximize shareholder (or owner) value, or firm value for short. Thus, the results-control ideal would be to reward each individual employee for doing what s/he does to increase firm value. However, because direct measurements of the individuals’ contributions to value creation are rarely possible, firms have to look for measurement and control alternatives. A commonly cited management axiom is: what you measure is what you get. This axiom works in practice because performance measures are linked to any of a number of incentives that employees value. Employees respond to these incentives. The measures, then, play valuable motivational, or decision influencing, roles. But what performance measure (or measures) should be used? At managerial levels of organizations, both at the corporate and entity levels, job responsibilities are both broad and varied. In common jargon, managers are said to be multitasking. Reflecting that task variety, the list of measures used in practice to motivate and evaluate managers’ performances is long. However, these measures can be classified into three broad categories. Two of these categories include summary, single-number,...
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...31 were $60,000. CD Productions would expect to have an accounts receivable balance on June 30 of a. $37,800 (90,000x0.1 (receivables from May sales) + 72,000x0.4 (receivables from June sales)). b. $42,000. c. $32,000. d. $28,800. 2. Which of the following changes would NOT change return on investment (ROI)? a. Decrease sales and expenses by the same percentage. b. Increase total assets. c. Increase sales dollars by the same amount as total assets. d. Decrease sales and expenses by the same dollar amount. 3. Beta Division had the following information: Av. operating assets in Beta Division $400,000 Operating income in Beta Division $50,000 Weighted average cost of capital 12% Minimum required rate of return 15% Operating Income Margin for Beta Division 20% What is the turnover ratio for Beta Division? a. 0.200 b. 0.125 c. 0.625 d. 8.000 SUPPORTING CALCULATIONS: Operating income margin=operating income/sales=0.2 Sales=operating income/0.2=50,000/0.2=250,000 Turnover = Sales/Av. Operating assets =250,000//$400,000 = 0.625 4. If the operating asset turnover increased by 50 percent and the margin increased by 50 percent, the ROI would increase by a. 50%. b. 25%. c....
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...Company uses ROI to measure the performance of its operating divisions and to reward division managers. A summary of the annual reports from two divisions is shown below. The company’s weighted-average cost of capital is 12 percent. Division A Division B Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,000,000 $8,750,000 Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 1,750,000 After-tax operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 1,180,000 ROI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25% 14% a. Which division is more profitable? Division B due to the operating income being higher than division A. b. Would EVA more clearly show the relative contribution of the two divisions to the company as a whole? Show the computations. ROI measures show that Div A is showing a higher profit per dollar. However, EVA measures show that both Div A and B are contributing equally to the overall residual income Div A EVA=1,000,000-[(6,000,000-500,00)*12%] = 340,000 Div B EVA=1,180,000-[(8,750,.000-1,750,000*12%)]=340,000 c. Suppose the manager of Division A was offered a one-year project that would increase his investment base by $250,000 and show a profit of $37,500. Would the manager choose to invest in the new project? Yes, the ROI is 15% compared...
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...Management Control System Notes Ch. 1 – The Nature of MCS Simons Levers of Control Belief systems: empower individuals and encourage them to search for new opportunities. They communicate core values and inspire all participants to commit to the organization’s purpose. COMMITMENT Boundary systems: establish the rules of the game and identify actions and pitfalls that employees must avoid. PUNISHMENT Diagnostic controls systems: allow managers to ensure that important goals are being achieved efficiently and effectively. They eliminate the manager’s burden of constant monitoring. However, they can create pressures that can lead to control failures. Interactive control systems: enable top‐level managers to focus on strategic uncertainties, to learn about threats and opportunities as competitive conditions change, and to respond proactively. * Management control systems are set in place to help a company achieve their organizational strategy and goals. * Work of management: planning, directing and motivating, and controlling. * An organization consists of a group of people who work together to achieve certain common goals. * The CEO or senior management decides on the overall strategies that will enable the organization to meet its goals. * The management control process is the process by which managers at all levels ensure that the people they supervise implement the organization’s strategies. * System: a prescribed and usually repetitious way of...
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...Quantitative questions on Management Control Systems University Question Paper May 2011: 1. A company is working at 50% of its capacity. It sells 20000 units at a price of Rs. 100 per unit. Cost per unit is Rs. 90, the breakup of which is as follows: Material Rs. 40 Manufacturing Cost Rs. 30 ( 30% is fixed) Selling Cost Rs. 10 ( 40% is fixed) Administration Cost Rs. 10 ( 50 % is fixed) When the company works @ 80% capacity, selling price will fall by 5% and material cost will rise by 5%. At full capacity selling price will fall by 8% and material cost will rise by 8%. Calculate Profit & Loss at each level of working. Should the company work at its full capacity? Solution: Working of the company at different capacities is as under Particulars | Capacity Utilisation | | 50%=20000 units | 80%=32000 units | 100%=40000 units | Sales | 20,00,000 | 30,40,000 | 36,80,000 | Less Variable costs | | | | Materials Cost | 8,00,000 | (42 x 32000) = 13,44,000 | (43.20 x 40000) =17,28,000 | Manufacturing Cost | (21 x 20000) =4,20,000 | (21 x 32000)= 6,72,000 | (21 x 40000)= 8,40,000 | Selling Cost | (6 x 20000)= 1,20,000 | (6 x 32000)= 1,92,000 | (6x 40000)=2,40,000 | Admin. Expenses | (5 x 2000)= 1,00,000 | (5 x 32000)= 1,60,000 | (5 x 40000)=2,00,000 | Total Variable Cost | 14,40,000 | 23,68,000 | 30,08,000 | Fixed Cost : | | | | Manufacturing cost | (9 x 20000) =1,80,000 | 1,80,000 | 1,80,000...
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...Questions Coke vs Pepsi 1) What is EVA? What are the advantages and disadvantages of using EVA as a measure of company performance? EVA stands for economic value added. EVA is a value based financial performance measure based on Net Operating Profit after Taxes, the invested capital required to generate that income, and the WACC. The primary advantage of EVA is that it provides a measure of wealth creation that aligns the goals of divisional or plant managers with the goals of the entire company. A primary disadvantage with EVA is that it struggles to control for size differences across organizational units compared to Return on Investment (ROI). Another disadvantage with EVA is that numbers can be easily altered or manipulated to boost EVA, therefore painting a better picture than what actually exist. EVA also places a large emphasis on producing immediate results, thereby creating a disincentive for management to invest in quality projects. 2) Please examine the historical performance of Coca-Cola and PepsiCo in terms of EVA. What trends do you observe? What are the factors behind those trends? What do you think are the key drivers of EVA? Through observing EVA for Coca-Cola and PepsiCo, we noticed a few things. First, Coca-Cola’s EVA seems to be more stable, but PepsiCo, which although was negative from 1994-1997, is increasing rapidly and surpassed the EVA of Coca-Cola in the year 2000. This dramatic change in EVA for the two companies can most likely...
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...hand, Sungai Emas ran port facilities such as marine support, emergency response, port management and navigational safety. Question 1 Determine the economic earnings of MarineCorp Sdn Bhd, Green Port Sdn Bhd and Sungai Emas Port Sdn Bhd. Economic earnings = NOPAT- Capital Charge * MarineCorp Sdn Bhd = 15 128 917- 854 306 = RM 14 274 611 * Green Port Sdn Bhd = 31 381 168- 45 969 400 = (RM 14 588 232) * Sungai Emas Port Sdn Bhd = 5 218 364- 187 801 = RM 5 030 563 Question 2 Rank the company in terms of their financial performance. The company may be ranked using several methods. The methods are such as based on net profit after tax, economic earnings, return on investment (ROI) or return...
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...Chapter 12 Performance Evaluation in Decentralized Organizations Solutions Review Questions 1. Firms decentralize because, as organizations grow, the number and types of decisions that need to be made increase substantially. A single individual will not have the relevant expertise and knowledge to make all of these decisions – thus, firms delegate decision-making responsibility. 2. The benefits include (1) timely decisions, (2) tailoring managerial skills and specializations to job requirements, (3) empowering employees, and (4) training future managers. The costs include (1) an emphasis on local versus global goals, (2) requires coordination of decisions, and (3) can lead to improper decisions because of a divergence between individual and organizational goals. 3. (1) Cost centers, (2) Profit centers, and (3) Investment centers. 4. Minimize the cost of producing a specified level of output or service. 5. Both minimize costs and maximize revenues. That is, maximize profit. 6. Maximize the returns from invested capital, or to put the capital invested by owners and shareholders of the organizations to the most profitable uses. 7. Controllability and informativeness. 8. An ideal performance measure (1) aligns employee and organizational goals, (2) yields maximum information about the decision or actions of the individual or organizational unit, (3) is easy to measure, and (4) is easy to understand and communicate. 9. In...
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...Portfolio Management Control SystemsHoofdstuk 11: Performance Measurement | | Naam :Docent : Klas : | HOOFDSTUK 11: PRESTATIEMETING Gebruikte informatie bij Control Managers: Zijn verantwoordelijk voor de effectiviteit en efficiency van het werk. Managers beheersen niet de kosten, maar beïnvloeden activiteiten van mensen die verantwoordelijk zijn voor de kosten. Managementactviteiten zijn gebaseerd op: 1) Informele informatie Observatie, face-to-face, vergaderingen en management by walking around 2) Operationele (output) informatie 3) Budgetrapportages: verschil in verwachtingen, plafonds en bodems. 4) Non financials Key variables, strategische factoren, key en kritische succesfactoren, key performance indicators Prestatiemetingsystemen Hoofd doel van prestatiemeting is om een hulpmiddel te zijn om de strategie te implementeren. Als de KSF’s zijn verbeterd dan is blijkbaar de strategie geïmplementeerd. Balanced Scorecard Voorbeeld: balanced scorecard, mixt financiële met niet-financiële informatie. Functie van balanced scorecard: 1) goal congruence (alle neuzen één kant op) 2) communicatiemiddel, interne communicatie verbetert 3) bepaling van organisatiedoelen 4) terugkoppeling vanuit realisatie naar strategie Grootste waarde: ermee bezig zijn, over nadenken en communiceren Gevaar: immuun worden, te gemakkelijk aan de kant schuiven Opstellen van de balanced scorecard, een set maatstavenkiezen: ...
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...Q.1 How is RI (EVA) analysis carried out? Explain advantages and disadvantages. Ans. The EVA method is based on the past performance of the corporate enterprise. The underlying economic principle in this method is to determine whether the firm is earning a higher rate of return on the entire invested funds than the cost of such funds (measured in terms of weighted average cost of capital, WACC). If the answer is positive, the firm’s management is adding to the shareholders value by earning extra for them. On the contrary, if the WACC is higher than the corporate earning rate, the firm’s operations have eroded the existing wealth of its equity shareholders. In operational terms, the method attempts to measure economic value added (or destroyed) for equity shareholders, by the firm’s operations, in a given year. Since WACC takes care of the financial costs of all sources of providers of invested funds in a corporate enterprise, it is imperative that operating profits after taxes (and not net profits after taxes) should be considered to measure EVA. The accounting profits after taxes, as reported by the income statement, need adjustments for interest costs. The profit should be the net operating profit after taxes and the cost of funds will be the product of the total capital supplied (including retained earnings) and WACC EVA= [Net operating profits after taxes – [Total Capital * WACC] Example; Following is the condensed income statement...
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