Stern Stewart & Co and EVA development

Essay by Fugitive0716University, Master'sA+, November 2009

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EVA Mini ProjectStern Stewart & Co. is one of the most successful consulting firms in the world. Their specialty is to create and measure wealth for their client's shareholders. They are experts in using modern financial theories to apply to their consulting opportunities. During their success, they developed the EVA (Economic Value Added) framework to help their clients in several different ways. They help their clients set goals, measure their performance, evaluate strategies and help empower their managers among other things. Along with developing EVA, they also created other proprietary concepts that have helped their success with their clients. MVA (Market Value Added) is another great example of a concept that helps dissecting the components and drivers of valuation. (What is EVA, 2009)EVA is the measure of economic profit. It is the difference between the Net Operating Profit After Tax and the opportunity cost of invested capital.

Weighted average cost of Debt and Equity Capital ("WACC") and the amount of Capital employed is how the opportunity cost is determined. EVA is a way of measuring a firm's profitability. Stern Stewart's numerical definition of EVA is calculated for any year by multiplying a firm's economic book value of capital © at the beginning of the year by the spread between its return on capital  and its cost of capital (K): EVA=(Rt-Kt)*Ct-1. EVA is simply a notion of residual income. (Ehrhardt 2008)EVA is the soundest performance metric, and the closest to shareholder value creation. EVA is a performance metric that investors like to increase because it is arithmetically the same with Net Present Value. MVA is the other performance metric that has been developed by Stern Stewart & CO. The other performance measurement that is extremely useful is MVA. MVA measures the difference between the market value...