Economic Value Added

(EVA)
• EVA = NOPAT – (Capital Employed * WACC)

• NOPAT = EBIT – Taxes

Sales
Less: VC
Less: FC
EBIT
Less: Taxes
NOPAT
EVA = NOPAT – (Capital Employed * WACC)
NOPAT = EBIT –Taxes

Q1. Calculate EVA

Assets = 100 Crores = Capital Employed
NOPAT = 20 crores
WACC = 10 %

EVA = 20 Crores – (100 Crores * 10%)

= 20 Crores – 10 Crores
= 10 Crores

Capitalised Value = EVA/WACC = 10 Crores/10% = 100 Crores

Q2.
Equity Share Capital Rs 5,00,000 EBIT = RS 2,10,000, Tax rate = 30%
12 % PSC Rs 3,00,000 Cost of Equity Ke = 15 %
10 % Debt Rs 2,00,000 Calculate EVA?
Capital Employed Rs 10,00,000
EVA = NOPAT – (Capital Employed * WACC) = 1,47,000- (10,00,000*12.5%) =Rs 22,000
NOPAT = EBIT –Taxes

NOPAT = EBIT –Taxes = 2,10,000 – (30% *2,10,000) = 2,10,000- 63,000

= Rs 1,47,000
Post Tax Cost of Debt = Kd (1-t) = 10 % * (1-0.30) = 7 %
WACC = (5,00,000 * 0.15 + 3,00,000 *0.12+ 2,00,000 * 0.07) = 12.5%
10,00,000
Q3. ESC = Rs 4,00,000
R & S = Rs 1,50,000
15 % Debt = Rs 4,50,000
Capital Employed = Rs 10,00,000
Tax rate = 40 %
EVA = NOPAT – (Capital Employed * WACC)
= 220500 – (10,00,000 * 16.59%) = Rs 54,600
NOPAT = EBIT –Taxes
NOPAT = 3,67,500 – (40 % *3,67,500)
= Rs 220500

Rf= 6 %
WACC
Rm = 20 % Ke = Rf + Beta (Rm-Rf)
Beta = 1.2 = 6 + 1.2 (20-6) =22.8%
EBIT = Rs 3,67,500 Kd = kd (1-t) = 15 (1-0.40) = 9.0%
Calculate EVA? WACC = (5,50,000* 22.8% + 4,50,000 * 9%)
10,00,000
= 16.59 %
Market Value Added (MVA)
• MVA = Value of the Firm – Capital Employed
= Market Capitalisation – Capital Employed

10000 Equity Shares Rs 10 Rs 1,00,000

Market Price of Equity Shares Rs 50 per share
Market Value of Equity Shares = 10000* 50 = Rs 5,00,000
MVA = Market Capitalisation – Capital Employed
= 5,00,000 – 1,00,000 = Rs 4,00,000
Q2/
Equity Share Capital = Rs 10,00,000 (Face value Rs 10) n = 100000 shares
General Reserves = 5,00,000
Surplus = Rs 10,00,000
Debt (LTL) Rs 5,00,000

Market Price per share = Rs 40 per share

MVA = Market Capitalisation – Capital Employed

= 100000*40 – (1,0,00,000+ 5,00,000 + 10,00,000+ 5,00,000)
= 40,00,000 – 30,00,000
= 10,00,000
Liabilities Assets
ESC (Rs 10) RS 10,00,000 Long term Assets Rs 20,00,000
R& S Rs 8,00,000 Current Assets Rs 10,00,000
12 %PSC Rs 2,00,000 Rs 30,00,000
10 % Debt Rs 5,00,000
CL Rs 5,00,000 Kd = I (1-t)/NP = 50,000 (1-0.30)/5,00,000 =7 %
Rs 30,00,000 Kp = Dp/NP = 24,000/2,00,000 = 12 %
EBIT = Rs 10,00,000 Ke = D1 +g = 3 +0.07 = 17 %
P0 30
Tax Rate = 30 %
Current Market Price of Share is Rs 30 WACC = ( 18,00,000 *17 %+ 2,00,000 *12% + 5,00,000*7%)
Company is expected to pay dividend of Rs 3 per share 25,00,000
Growth rate of company = 7 % = 14.6 %
Calculate EVA and MVA?
EVA = NOPAT – (Capital Employed * WACC) = 7,00,000 – (25,00,000 *14.6%) = Rs 3,35,000
NOPAT = EBIT –Taxes
MVA = Market Capitialization – Capital Employed
= 100000*30 -25,00,000 = Rs 5,00,000
Shareholder’s Wealth
Creation
• Shareholder value is a business concept, and referred as shareholder value
maximization or as the shareholder value model, which suggests that the
ultimate measure of a company's achievement is the extent to which it
augments shareholders value.

• Ways to increase in Shareholders Value:

i. To refer to the market capitalization of a company.
ii.To refer to the model that the main goal for a company is to increase the
wealth of its shareholders (owners) by paying dividends and/or causing the
stock price to increase.
• The idea of the shareholder approach tries to increase the
organization's value by increasing firm's earnings, by increasing
the market value of corporation's shares and by increasing also
the frequency or amount of dividend paid.
• Additionally, many business analysts stated that shareholder
value approach provides managers with clear mission and it
enabled decision making.

• Shareholders' money should be used to earn a higher return than

they could earn themselves by investing in other assets having
the same amount of risk.

• The term, shareholder value was originated by Alfred Rappaport

in 1986.
• There is more pressure on corporate directors to measure,
manage and report the creation of shareholder value regularly.
• Creating value for shareholders is now extensively recognized corporate
objective. The interest in value creation has been motivated by several
developments.
1.Capital markets are becoming progressively global. Investors can willingly shift
investments to higher yielding, often foreign, opportunities.
2.Institutional investors, which usually were inactive investors, have begun
exerting influence on corporate managements to create value for shareholders.
3.Corporate governance is instable, with owners now demanding liability from
corporate managers. Manifestations of the increased assertiveness of
shareholders include the need for executives to justify their compensation
levels, and well-publicized lists of underperforming companies and overpaid
officials.
4.Business press is highlighting shareholder value creation in performance rating
exercises.
5.More focus is to link top management compensation to shareholder returns.
Framework of Shareholder Value Creation
Return on Investment
 • Return on investment (ROI) is a performance measure used to
evaluate the efficiency or profitability of an investment or compare
the efficiency of a number of different investments.

• ROI tries to directly measure the amount of return on a particular

investment, relative to the investment’s cost.
• To calculate ROI, the benefit (or return) of an investment is divided
by the cost of the investment. The result is expressed as a
percentage or a ratio.

• ROI = Current Value of Investment – Cost of Investment

Cost of Investment

• ROI is measured in %.