Economic Value Added Application

Essay by ParulJainCollege, UndergraduateA, June 2010

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Economic Value Added � PAGE �5�


EVA Application



Stern Stewart & Co. is an International Consulting Firm, which assists its client companies to create the value and wealth by the application of certain specific tools of the 'Modern Financial Theory'. The Management of the company has better understanding of the market, which is proving significant for the success of the client companies. The analysis of the factors, which can affect the share price, organizational value and the return from bond, also help to increase the worth and prosperity of the client companies. The corporation offers a 'Value Perspective Model' to the client, rather than the conventional accounting procedures (Stern Stewart & Co., 2009).

Economic Value Added

Economic Value Added (EVA) can be defined as the measurement of the financial performance of a company on the basis of residual wealth. The actual economic profit of a company is measured by the 'EVA'.

It is the measurement of the monetary earnings of a business. EVA is the most effective performance evaluation tool of an organization in the comparison of the EPS, EBITDA, ROIC etc. The EVA measures all the cost, such as 'financing and operating' of a business, which is closely related with the value for the shareholders. The increase in EVA always seems good for the fiscal strength of the organization. The EVA is calculated from the difference of the NOPAT (Net operating Profit after Tax) and invested capital's opportunity cost. The opportunity cost of the invested capital is computed by multiplying the Capital Invested from the Weighted Average Cost of Capital (WACC).

EVE = NOPAT- Opportunity Cost


Opportunity Cost = Capital Invested*WACC

Market Value Added

Market Value Added (MVA) can be described as the difference between the actual current value...