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One of the most basic and fundamental objectives of any commercial organization is to
maximize the shareholders’ wealth. One thing that must be kept in mind before making any
decision to raise, invest, or retain a rupee in the business is that the decision must be able to
create more value than the investor might have achieved with an alternative investment
opportunity of similar risk. Value maximization is the essence of economic growth. Capital is
a scare resource that all businesses must compete for and manage efficiently. The interests of
stakeholders and society are best served when the scare resources are put to their most productive
use. No enterprise survives or grows if it fails to generate wealth for the stakeholders. An
enterprise may exist without making a profit, but cannot survive without adding value. Managing
for value directs the scarce resources to their most promising use and most productive user.
The traditional measures like Return on Capital Employed (ROCE), Return on Net Worth
(RONW), Earnings Per Share (EPS), etc. do not represent the shareholders’ wealth because all these measures consider the borrowing cost and ignore the cost of equity. Certain value-based
performance measures, e.g., Cash Flow Return on Investment (CFROI), Cash Value Added
(CVA), Shareholder Value Added (SVA) and Economic Value Added (EVA), measure the corporate
financial performance.
Out of these new performance measures, EVAis the most popular as a performance measure
and a yardstick of wealth creation. It is the performance measure most directly linked to the
creation of the shareholder’s wealth over time.
Industries need to improve their financial performance from the point of shareholder’s
value addition (Parasuraman, 2000). Non-creation of EVA leads to investor dissatisfaction.
This in turn affects the equity mobilization activities of corporate sector that significantly
impact the economy. In this context, it is relevant to see whether corporate sector is earning
returns on their cost, and thereby creating wealth for their shareholders.
Objectives: To measure shareholder’s wealth in terms of EVA for various sectors of Indian
manufacturing industry.
Hypothesis: There is no significant difference among calculated EVA of different sectors of
Indian manufacturing industry.
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