Josh Well, because Atherton\'s book value firm\'s shares, the firm\'s book value
ID: 2539369 • Letter: J
Question
Josh Well, because Atherton's book value firm's shares, the firm's book value price of the firm's common stock and therefore performance. with changes in the market price of the reflect management's efforts to maximize the be used to evaluate management's Now, what about "Economic Value Added? Mia During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Economic Value Added, or EVA, to better assess management's performance in maximizing their shareholders' wealth. Atherton'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 Atherton's from its In turn, Atherton'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 Atherton's management? Josh Give me a second to think.. . OK, it's better to evaluate the performance of Atherton'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 trueExplanation / Answer
Josh: Well, because Atherton's book value Does Not move with changes in the market price of the firm's shares, the firm's book value will reflect management's efforts to maximize the price of the firm's common stock and therfore should be used to evaluate management's performance.
It is computed by subtracting Annual Cost of Capital (or Invested Capital * WACC) from it's NOPAT (Normal Operating Profit after Tax).
In turn, Atherton's annual cost of capital is calculated by multiplying it's total Invested Operating Capital, which includes it's net fixed assets and net operating working capital, by the after tax percentage cost of capital.
Josh: Give me ........the better the managerial decisions made, the higher the after-tax net operating income earned, the higher the difference between this net operating income and the cost of capital needed to generate that income, and the higher the EVA, or true economic profit, earned by the company.
Good luck
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.