A DISCUSSION ON ECONOMIC VALUE ADDED
The main objective of the management is to maximize the shareholder’s wealth. Shareholders’ wealth is measured in terms of the returns they receive on their investment and is also directly related to the market value of the company’s share. The market value of share depends upon many factors, the most important being the financial performance of the company. *Assistant Professor, Department of Commerce, Government College, Murthal, (Sonepat) (Haryana) **Assistant Professor, Govt. College, Department of Commerce, Gharaunda (Karnal) ***Assistant Professor, Department of Management, Hindu College, Sonepat 131001(Haryana)
’Economic Value Added’ (EVA ) is a trademark of the Stern Stewart consulting organization. Stern Stewart & Co. is a global consulting firm that specializes in helping client companies in the measurement and creation of shareholder wealth through the application of tools based on modern financial theory. Stern Stewart maintains that the implementation of a complete EVA −based financial management and incentive compensation system gives managers both better information and superior motivation to make decisions that will create the greatest shareholder wealth in any publicly−owned or private organization. EVA is a method of finding the real profitability of a project, just like other factors of production; capital is also a factor of production. We should also adjust the cost of capital employed to find out the real profit of a project. In India, very few companies have adopted EVA as a tool of performance measurement, some of them being Infosys Technologies Ltd, NIIT Ltd, BPL Ltd, Hindustan Lever Ltd, Reliance Industries Ltd, Balrampur Chini Mills Ltd. Infosys Technologies was the first Indian company to disclose its EVA in the annual report for the year 1995−96. Another Indian company that has adopted EVA as a tool for performance measurement is NIIT. More and more Indian companies should adopt EVA as a tool for performance measurement as it is definitely better than other measures commonly adopted. Accounting profit has become the "standard" designation of profit in the business world, however economists believe that economic profit is a truer report on the actual economic value added (EVA) derived from the business activities and should be used when making decisions about entering, staying in or exiting a market. Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed by investors. Theoretically, market value at a point in time is equal to the total capital employed plus or minus the net present value of all future Economic Value Added. Therefore, market value is maximized by maximizing the present value of future Economic Value Added. The purpose of the paper is to describe the conceptual framework of Economic Value Added.
This study is descriptive in nature. Secondary data collected from different sources like books, articles, journals, website etc. have been used for describing the concept of Economic Value Added.
Economic Value Added, Shareholder’s wealth, Cost of capital, Economic Profits, Market Value