A Comparative Study of EVA and MVA of Power Sector Companies in India

Abstract

In today’s business world, shareholders’ wealth maximization is very important. The survival of any company is not possible without wealth generation for its shareholders. Many companies consider equity capital as free cost of capital but this approach is not relevant in the modern business world because equity is a costlier source than other sources of finance. Economic Value Added (EVA) helps to calculate the true profitability of the company by considering the cost of equity. EVA concept has been given by Stern Stewart and Co. The company has given 160 adjustments in GAAP (General Accepted Accounting Practices) rules for the calculations of true economic profit. In the study three adjustments have been made for the calculation of economic profit. Economic value added is an important performance metric; and Market Value Added (MVA) is the wealth metric of economic value added and is positively linked with it. Power sector companies have been taken under consideration for this study. In this study it has been found that Indian Oil Corporation Ltd. is the most wealth creating company and Reliance Power is the most wealth destroying company for the year 2009-2011. The reason for negative economic value added is high cost of equity.

Keywords: Power Sector Companies, Ranking

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