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[object Object],[object Object],PRESENTATION ON (EVA,MVA,CAPM)
Introduction of EVA ,[object Object],[object Object],[object Object],[object Object]
A Definition… ,[object Object],Land Labor Capital Time
Definition for EVA ,[object Object],[object Object],EVA Net operating profit Taxes Cost of capital
An Integrated Measure of  Business  Performance ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],EVA = Operating Profit  - Opportunity Cost of Running the Business The return (or expectation) foregone by not investing in a comparably risky portfolio of projects—the weighted cost of debt and equity capital. Opp. Cost  =  Cost of Capital x   Beg. Capital Cost of Borrowing? Dividend Yield?
An Integrated Measure of  Business  Performance EVA  =  NOPAT  -  c*  x   Beg. Capital ,[object Object],[object Object],[object Object],[object Object],[object Object],EVA can also be expressed as: EVA  =  (Return on Capital  -  Cost of Capital)  x   Beg. Capital
EVA Implementation Process Understand and  appreciate current  readiness  for change Determine strategy (objectives, messages, and media) Develop training/ communication materials Rollout Evaluate Results Step 1 Step 2 Step 3 Step 4 Step 5
Framework Example:  A Major Oil & Gas Company Operating Profit Gasoline Operating Profit Distillate Operating Profit Car Wash Operating Profit Convenience Store Oper. Profit Lubricants Operating Profit Gasoline Operating Profit
Calculating (NOPAT) ,[object Object],[object Object],Particulars Amount (Rs.) Sales  24,36,000/- Cost of Goods sold (-) 17,00,000/- Gross Profit 7,36,000/- Selling, general & Admin Exp. (-) 4,00,000/- Operating Profit 3,36,000/- Taxes (-) 1,34,000/- NOPAT 2,02,000/-
Cost of Capital ,[object Object],[object Object],[object Object],[object Object],[object Object]
Weighted Average Cost of Capital (WACC) ,[object Object],[object Object],[object Object],Particulars Amount (Rs.) Long Term Debt 5,00,000/- Preferred Stockholders Equity 2,00,000/- Total Common Equity 7,00,000/- Total Capital 14,00,000/-
Calculation of WACC  for XYZ Company The total Weighted Average Cost of Capital (WACC) =  1,68,478 / 14,00,000 = 12.03% Particulars Amount (Rs.) Cost (%) Total  (Rs.) Long Term Debt 5,00,000/- 9.47 47,375/- Preferred Stock Cost 2,00,000/- 11.2 22,400/- Common Equity Cost 7,00,000/- 14.1 98,700/- Total Capital 14,00,000/- - 1,68,475/-
Calculation of EVA  for XYZ Company NOPAT Rs. 2,02,000/- Capital Employed  (Including Rs.1,00,000/- Reserve & Surplus)  Rs. 15,00,000/-  Cost of Capital 12.03% Capital Charge  (12.03/100 x Rs. 15,00,000/-) Rs. 1,80,450/- Economic Value Added (EVA)  (Rs. 2,02,000 – Rs. 1,80,450) Rs. 21,550/-
Strategies for Increasing EVA ,[object Object],[object Object],[object Object],[object Object],[object Object]
Advantages of EVA ,[object Object],[object Object],[object Object],[object Object]
Limitations of EVA ,[object Object],[object Object],[object Object],[object Object]
Conclusion As a performance measure, Economic Value Added forces the organization to make the creation of shareholder value the number one priority. EVA is changing the way managers run their businesses. When business decisions are aligned with the interest of the shareholders, it is only a matter of time before these efforts are reflected in a higher stock price.
MVA (MARKET VALUE ADDED) ,[object Object],[object Object]
Measuring Corporate Success: The Ultimate Financial Test ,[object Object],[object Object],[object Object],[object Object],MVA ! Total Market Value Cost of Invested Capital
[object Object],[object Object],[object Object]
The formula for MVA is: ,[object Object],[object Object],[object Object],[object Object]
IMPORTANCE OF MVA ,[object Object]
MVA Calculation. ,[object Object]
FORMULA FOR MVA   ,[object Object]
CAPM ,[object Object]
[object Object],[object Object]
Assumptions of CAPM: ,[object Object]
THANK YOU FOR YOUR KEEN INTEREST ,[object Object],[object Object],[object Object]

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Eva22

  • 1.
  • 2.
  • 3.
  • 4.
  • 5.
  • 6.
  • 7. EVA Implementation Process Understand and appreciate current readiness for change Determine strategy (objectives, messages, and media) Develop training/ communication materials Rollout Evaluate Results Step 1 Step 2 Step 3 Step 4 Step 5
  • 8. Framework Example: A Major Oil & Gas Company Operating Profit Gasoline Operating Profit Distillate Operating Profit Car Wash Operating Profit Convenience Store Oper. Profit Lubricants Operating Profit Gasoline Operating Profit
  • 9.
  • 10.
  • 11.
  • 12. Calculation of WACC for XYZ Company The total Weighted Average Cost of Capital (WACC) = 1,68,478 / 14,00,000 = 12.03% Particulars Amount (Rs.) Cost (%) Total (Rs.) Long Term Debt 5,00,000/- 9.47 47,375/- Preferred Stock Cost 2,00,000/- 11.2 22,400/- Common Equity Cost 7,00,000/- 14.1 98,700/- Total Capital 14,00,000/- - 1,68,475/-
  • 13. Calculation of EVA for XYZ Company NOPAT Rs. 2,02,000/- Capital Employed (Including Rs.1,00,000/- Reserve & Surplus) Rs. 15,00,000/- Cost of Capital 12.03% Capital Charge (12.03/100 x Rs. 15,00,000/-) Rs. 1,80,450/- Economic Value Added (EVA) (Rs. 2,02,000 – Rs. 1,80,450) Rs. 21,550/-
  • 14.
  • 15.
  • 16.
  • 17. Conclusion As a performance measure, Economic Value Added forces the organization to make the creation of shareholder value the number one priority. EVA is changing the way managers run their businesses. When business decisions are aligned with the interest of the shareholders, it is only a matter of time before these efforts are reflected in a higher stock price.
  • 18.
  • 19.
  • 20.
  • 21.
  • 22.
  • 23.
  • 24.
  • 25.
  • 26.
  • 27.
  • 28.

Editor's Notes

  1. Point out that economics is a study of allocating scarce resources. Farmers are very accustomed to thinking about resources such as land, labor, and capital (which includes production inputs). But they may not consider time fully as they make decisions about some enterprises, including value-added options. It is important here to emphasize the time requirement.