Another finance related question Finpro. Can you help me with this one?

P&L for the year xx

拢000

Turnover300
___
PBIT 60

Interest12

Tax24
___
PAT24

Balance Sheet as at xx

拢000

Fixed Assets 140
Current Assets 60
Debt 100
Net Assets 100
Equity 100

Tax is charged on PBIT after deduction of interest at a rate of 50%, and BKG鈥檚 after tax cost of capital (WACC) is 12%. The equity of the company consists of 100,000 shares, with a current market value of 拢2 per share.

What are the market value added and economic value added figures for BHG plc? Briefly indicate how these two concepts differ from one another.

What is the difference, conceptually and numerically, between the WACC and the return on capital employed? How does the difference between these two measures relate to economic value added?

CEO of Co., said, 鈥淓VA makes managers act like shareholders.鈥?Do you agree? Explain your reasoning

This is also one of the questions which came in my university past paper. Any help would be really appreciated. Thnx

BHG plc details
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PAT=拢24000
ADD:Tax adjusted interest
12000(0.5) =拢6000
-------------
PAT before Interest 拢30,000
-------------
Weighted Average Cost
of Capital = 12%

Cost of CapitalEmployed = 12%(200,000)=24000

Economic Value Added= NOPAT-COCE
=拢30,000 -拢24,000
= 拢6000
Market Value Added is Value Added to Business by Management
since Business was established over and above money invested by the owners.

MVA=Market capitalisation-invested capital

Market capitalisation of Equity shares=拢2(100000)=拢200000
Add: Debentures=拢100000
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Market capitalisation =拢300000

Invested Capital =拢100000+拢100000=拢200000

MVA=拢300000-拢200000=拢100000

MVA may be considered as accumulated EVA's generated by Business over time.

Difference:
-----------------
Economic profit helps to distinguish between a Performance metric and a wealth metric.
A performance metric refers to a measure under company's control,such as return on capital.A wealth metric on the otherhand is a measure of value-such as equity market capitalisation.
MVA is not a performance metric like EVA,but instead it is a wealth metric,measuring the level of value a company has accumulated over time.As the company performs well overtime it retains earnings..This will improve the book value of company's shares and investor's will likely bid up the price of those shares in expectation of future earnings causing the company's value to
rise.As this occurs the difference between the company's market value and capital contributed by investors represents the excess pricetag the market assings to company as a result of past operating success.

WACC &ROCE

ROCE is Profit before longterm interest and Tax to average capital employed.
WACC is the minimum required rate of return on assets of the firm.

In the above problem total cost of capital comes to 12%(拢200000)=拢24000.
Maintenance of shareholder value will require the company to earn NOPAT over cost of capital.
In other words ,to maintain shareholder value the %NOPAT to capitalemployed should be greater or atleast equal to the % of WACC, i.e 12% in this case.

CEO of a Co said"EVA makes managers act like shareholders".

Managing for value has become the mantra of today's Executive in most parts of the world.Effective use ofcapital is the key to shareholder value,that message is fundamental in EVA tool.It is a major requirement to make EVA successful in an enterprise.

Just measuring EVA is not enough ,it is important for an organisation implementing EVA,to change behaviour of its managerial employees.It is important that these managers and employees think ,act and are paid like owners.There should be
enough freedom given to them to make decision,hold them responsible for results,and are required to operate in an improved set of Corporate Governance framework.

I don't feel it is fair to ask that of managers. Unless they are well compensated!!!...I am an employer...and i do not expect my managers to do any of the profit and loss etc. stuff ...its too risky i let my CFO take a healthy share of his duties right about then!!..***smile***....have fun...

PEACE