Question

Mia During the 1990s, the consulting firm Stern, Stewart& Company d veloped the concept of Economic Value Added, or EVA, to better assess management's performance in maximizing their shareholders' wealth. Western G&E's EVA equals the additional profit created in excess of the after-tax operating income necessary to finance its total after-tax cost of capital, which is expressed in annual dollars. It is computed by subtracting Western G&E's _annual dollar cost of capital from its operating profit In turn, Western G&E's annual cost of capital is calculated by multiplying its total working capital, by the after-tax percentage cost of capital. OK, given that description, here's a question for you: Compared to the book value, what is the operating capital, which includes its net fixed assets and net operating advantage of using the EVA to evaluate the performance of Western G&E's management? Josh Give me a second to think...OK, it's better to evaluate the performance of Western G&E's management by using the company's EVA rather than the book value of its shareholders' equity because the better the managerial decisions being made, the operating income earned, the the cost of capital needed to generate that income, and the economic profit, earned by the company. the after-tax net the difference between this net operating income and the EVA, or true Mia Nicely done! Does this make your reading of Western G&E's annual report easier?

Answer 1

1: Invested

(Cost of capital = Total invested operating capital*After tax cost of capital)

2: EVA measures the true economic profit and differs from accounting income. It represents the real benefits of capital investments. Book value on the other hand considers the historical value of assets which does not hold any significance in the present.

3: Higher, greater, higher

As managerial decision quality improves, the EVA will increase.

4: Yes, the report gives a picture of the efficiency of the management decisions and the knowledge of EVA helps to understand the report in a better manner