1) The study examines the relationship between Economic Value Added (EVA) and share price for 10 companies listed on the BSE SENSEX index over an 8-year period from 2005 to 2012. 2) Regression analysis found that EVA had a negative or insignificant impact on share price, while earnings per share had the strongest influence. 3) It was concluded that EVA does not significantly influence share price for these companies, and that earnings per share is a more important determinant of share price movements.

1. Project Tittle
“A STUDY OF ECONOMIC VALUE ADDED (EVA)
AND ITS RELATIONSHIP WITH THE SHARE PRICE”
Internal Guide :- Prepared By:-
Suman Rajesh T.D Praveen Kumar H.P
Asst.Prof, MBA 4th Sem, MBA
P.E.S.C.E, Mandya P.E.S.C.E, Mandya

2. Definition of ‘Economic Value Added’(EVA) &
Share Price
a) A measure of a company's financial performance based on the residual wealth
calculated by deducting cost of capital from its operating profit (adjusted for taxes on a
cash basis). (Also referred to as "economic profit".)
The formula for calculating EVA is as follows:
= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)
This measure was devised by Stern Stewart & Co. Economic value added attempts to
capture the true economic profit of a company.
b) The price of one share of stock is Share price.

3. Executive Summary of the Project
• Eva Produce a more economically meaningful version of residual income.
• Attempt- To analyze the EVA with that of Market price to see whether, EVA is the main
driver for shareholder value or not.
• The project is conducted in order to exhibit the relationship between stock return and
economic value added (EVA) as compare to the relationship with other variable such as net
income (NI) and operating cash flow (OCF) with in BSE stock Market.
• It is evident from the study that the contribution of Operating cash flow is higher as
compare to EVA and NI which is a prediction of the least contribution of the EVA in stock
return as shown by the individual regression analysis of these variables with stock return.
• Finally EVA is negatively contributing to the stock return as compare to the other variable
shown both by regression.
• One of the major benefits of using EVA as a decision tool is in the area of asset
management, allocation of resources and capital structure including the operating leverage.
Furthermore, EVA is appealing to developing companies that need to fund their projects
through satisfying the value of enhancement requirements of investors. The objective of
this approach to capital allocation is to ensure that the line of business is constantly
contributing to the improvement of the return on existing capital, seeking investment that
create value to shareholders and maintaining optimal capital structure levels.

4. Rational for the chosen Topic & Statement of the
Problem.
• The management decision-making process involves mainly the evaluation of
investment and the allocation of the company's resources. The traditional process in
making such decisions is based on cash flow and it is referred to as capital budgeting.
EVA may be added now as an additional tool in making investment decisions that
involves new projects, mergers and acquisitions. In this respect, EVA is close to net
present value (NPV) technique. This would provide a new dimension for managers
to maximize wealth for the shareholders.
• The development in the Indian capital market along with the increased awareness
among the shareholders has increased the pressure on the companies to consistently
perform better. Investors are very much keen in knowing what amount of wealth the
company has created for the shareholders. So, the value created by the company is
more linked to the market price of the shares. So, the question that has to be
addressed here is that whether the value addition by the company is also a
dependent factor for the movement in the share price. Hence, there was a need to
find out the relationship between the value added by the company and share price.
Hence this study entitled “A study of Economic value added (EVA) and its
relationship with the share price” was carried out.

5. Objectives of the study
• The objectives of this study were as follows:
• To ascertain EVA for sample companies.
• To analyze the relationship between EVA and share price.
Evidences from India
• In India the concept of EVA is still in its evolving stage. Very few companies have adopted this
technique. Infosys had added Rs. 20 crores in FY98. Dr. Reddy’s Laboratories had
experienced a growth of its value to Rs. 14.5 crore in FY98 which was negative figure
of –Rs. 3.5 crore before introducing EVA in FY97.

6. Sample Size:- 10stocks, which are constituents of
BSE SENSEX.
• BHEl- Engineering & Manufacturing Enterprise
• BP - Crude oil
• ITC- FMGC Products
• GAIL- Natural gas pipeline projects
• TATA POWER- Power generation
• TATA STEEL- Steel producing company
• HERO MOTORS- Motorcycle Manufacturing
• HINDALCO INDUSTRIES- Aluminum Manufacturing
• L & T- Engineering, construction, Manufacturing, IT,
Financial services, Power,
• GRASIM INDUSTRIES- Synthetic fabrics

7. Project Design
• Descriptive Research- The idea behind this type of research is to study
frequencies, averages, and other statistical calculations. Although this research is
highly accurate, it does not gather the causes behind a situation. Descriptive research
is mainly done when a researcher wants to gain a better understanding of a topic.
• Analytical Research-Analytical means the researcher use facts and information
already available and the analysis and making the evaluation.
• Secondary Data.
Limitations of the Project
• The Project is a limited time span of 1 to 2 year.
• The Project includes selected stock listed in BSE Stock market.
• The study is undertaken for only 8 Years period only.

8. Data Analysis Techniques
• Simple Regressions:-
Generally, Regression expresses the relationship among variables which helpful in
estimating and predicting the average value of one variable for a given value of the other
variable and in the case of linear regression, a dependent variable y in a regression model
tends to increase in direct proportion to an increase in the values of independent
variables. following data were taken.
• Capital employed, Earnings per share, Net income of the company, ROCE, RONW
Trend Analysis:-
• Forecasting technique that relies primarily on historical time series data to predict the
future. The analysis involves searching for a right trend equation that will suitably
describe trend of the data series. The trend may be linear, or it may not. A linear
trend can be obtained by using a least squares method . The line has the
equation y = a + bt where t = 1,2,3 . . ., b = slope of the line, and a = value of y when t =
0. The coefficients of the equation, a and b, can be determined using these equations.

9. Overall Observation From Data Analysis
From the data analysis, It is clear that EVA will rise if operating efficiency is improved, If value
adding investments are made, If uneconomic activities are curtailed, and If the cost of capital is
lowered. In more specific terms, EVA rises when,
• The rate of return on existing capital increases because of improvement in operating
performance. This means that the operating profit increases without infusion of addition
capital in the business.
• Additional capital is invested in projects that earn a rate of return greater than the cost of
capital.
• Stopping the activities which earns inadequate returns.
• Lowering the cost of capital by altering the financing strategy.
The share price of the companies are showing increasing trend irrespective of the trend in EVA.
Even the companies which are having negative EVA are showing an increasing trend in the
share price. This shows that movement of share price in Indian stocks is not influenced by the
EVA. In order to conduct deep analysis and to find out further empirical evidence regression
tests have conducted. This test will also reveal the other factors that influence the share price.

10. Observation From Regression
Analysis
All the predictors(Constant) i.e., EVA, ROCE, RONW, EPS and profit influence the share
price(Dependent variable) to the some extent.
It is evident that influence of EVA on share is less; in fact it is All (2005-2012) years
negative. This is not possible in the real life situation. A value of the firm cannot be
inversely influence the share price. Hence, it can be concluded that EVA has no influence
on the share.
• 2005 - among other determinants RONW influence the share price the most. It shows
the highest T-value among all others. Hence, the test infers that in the year
2005, RONW is the most determining factor of share price than EVA and other
factors.
• 2006 – RONW
• 2007 – EPS
• 2008 – EPS
• 2009 – EPS
• 2010 – EPS
• 2011 – EPS
• 2012 – EPS

11. Suggestions
• For Company:
A company has to follow the wealth maximization principle in order to have good
corporate governance. The company has to direct all the activities towards maximizing
share holders value. A company can increase its shareholders’ value in the following
ways (this is the outcome of the analysis of objective 1):
• The rate of return on existing capital increases because of improvement in operating
performance. This means that the operating profit increases without infusion of
addition capital in the business.
• Additional capital is invested in projects that earn a rate of return greater than the
cost of capital. It also means that investments with positive NPV only should be
accepted.
• From the existing business unprofitable assets has to be sold, so as to give a greater
return than the capital charge.
• Lowering the cost of capital by altering the financing strategy.
For investors:
• The investors who are thinking of investing on the share with long term orientation
then they must invest in the company which has been proving consistently to be
value creators. This will ensure the capital appreciation of the investment done by the
company.

12. Conclusion
• Objective 1: To ascertain EVA for sample companies.
From the analysis of the EVA of the company it can be concluded that the value drivers
which is responsible for the value creation and value erosion of the company are operating
profits, Cost of capital and return on new investments made. Hence, the company should
focus on redesigning the capital structure in order to reduce the capital cost and invest on
only those investments which will earn more returns.
• Objective 2: To analyze the relationship between EVA and stock price.
From the study it can be concluded that the relationship between the EVA and share price
is not significant. There is a negative relationship between the share price and EVA in
some occasion, which is an unrealistic outcome. In real life situation there can be negative
relationship between the share price and EVA of the company. Hence, we can say that the
EVA does not influence share price significantly. But when we considered other
determining factors such as EPS, ROCE, RONW and profit of the company, EPS turned out
to be a major determining factor of share price. Hence, we can conclude that Earning per
Share is a major influencing factor of the share price among EVA, ROCE, RONW and
Profit of the company.

13. Bibliography
• Anastasias, Christos & Dimitris “Validity of the Economic Value Added Approach:
An Empirical Application”, European Financial Management, Vol 13, pp 71-100
• Dr. Raman, D.V. (2007), “MVA and EVA: Some empirical evidence”, Journal of
Finance,, Vol 11, pp 23-41
• Dr. Karam Pal and Sura, Jasvir S. (2007)“Economic Value Added and Traditional
Performance Measures”, Amity Journal of business Strategy, Vol.1(2), June 2007, pp
110-120
• Garvey, T. Gerald and Milbourn, Todd T,(2000), “EVA versus Earnings: Does It
Matter Which is More Highly Correlated with Stock Returns?”, Journal of accounting
research, Vol 38.
• Ferguson, Robert, Rentzler, Joel, and Susana Yu (2005) “Does Economic Value Added
(EVA) Improve Stock Performance Profitability?”, Journal of applied finance, Vol 23.
• Griffith, John M (2006), “EVA and Stock Performance”, Journal of Investing, Vol 12.
• Biddle, C. Gary, Bowen, M. Robert and Wallace, S. James (1998),“Economic Value
Added: Some Empirical Evidence”, Managerial Finance, Vol 24, pp 60-71.
• Brewer, C. Peter, “Economic Value added: its uses and limitation”, SAM
Advancement management Journal, 1999, Vol 19, pp 21-29.
Websites
• www.investopedia.com
• www.capitaline.com
• www.valuebasedmanagement.net
• www.evanomics.com
• www.rbi.org.in
• www.bseindia.com
• www.indiainfoline.com

14. Thank You !!!