The increasing importance of capital market and shareholders' activity in today's competitive globalized world has put managers under tremendous pressure for better financial management. Economic Value Added (EVA), nowadays, is considered as one of the most important financial performance measures of an industry. Cost of capital is one of the major determining factors of EVA. This article explains the impact of cost of capital on EVA. It also examines the creation of EVA in selected rubber and plastic processing industries in two different economies, viz., the transition economies of the Czech Republic and the well-developed market economy of the United Sates of America. The findings reveal that the Czech Republic performs better than USA in applying EVA.
Companies in developed capital market usually try to use their equity and debt capital in such
a way so as to maximize the market value of the company in the long run. Economic Value
Added (EVA) is such a tool that defines the amount a business generates through the
measurement of the rate of return, over the cost of invested capital. EVA, the registered
trademark of Stern Stewart & Co., is one of the highly discussed topics in today’s financial
world. It is a financial performance measure that helps to reduce cost of capital and improve
profits, which in turn increase the shareholders’ value. EVA is a simple measure that provides
information about shareholders’ real wealth creation [12]. As maximizing shareholders’ wealth
is the main motive of most privately held for-profit companies, application of EVA is
becoming increasingly popular in today’s business world.
Structure of capital i.e., the ratio of equity and debt, play a very crucial role to the amount
of capital expenses available to a company. The amount of capital expenses depends on the
effectiveness and the risk of business activities of individual companies. Companies with high
ratings, usually obtain capital easily, at low costs, at the international financial markets.
For taking different financial decisions, especially those, tyhat are strategic in nature (such
as selection of the source of finance, investment plans realization, company’s evaluation, etc.),
knowledge of the cost of capital is very important. Moreover, these areas of financial
management are closely interconnected. The price of capital, as well as the availability of
capital is also important. Therefore, calculating the cost of capital is very crucial in the
analysis of EVA. |
