EVA & EVA's

The concept of EVA (Economic value-added), as a new coming financial evaluation index, is well established in finance-oriented theory, but only recently has the term moved into the mainstream of corporate finance and attracts the people's increasingly attention, as more and more firms adopt it as the base for business planning and performance monitoring around the world. Simply explained, Economic value-added (EVA) is the after-tax cash flow generated by a business minus the cost of the capital it has deployed to generate that cash flow. Representing real profit versus paper profit and a residual income, EVA underlies shareholder value, increasingly the main target of leading companies' strategies.EVA is not only based on the traditional financial measurements, but also better than its long-term-running former historical evaluators. What's the main differences between the two accounting analyses, as a measure of profit-gained performance are that how to calculate the cost of the capital. There is growing evidence that EVA, not earnings, determines the value of a firm, which as follows: Earnings per share tells nothing about the cost of generating those profits. Profits also increase taxes, thereby reducing cash flow, so that engineering profits through accounting tricks can drain economic value.Determining a firm's cost of capital requires making two calculations, one simple and one complex. The simple one figures the cost of debt, which is the after-tax interest rate on loans and bonds. The more complex one estimates the cost of equity and involves analyzing shareholders' expected return implicit in the price they have paid to buy or hold their shares. Investors have the choice of buying risk-free Treasury bonds or investing in other, riskier securities. They obviously expect a higher return for higher risk. To attract investors, weak firms must offer a premium in the form of a lower stock price than stronger firms can command. This lower price amounts to the equivalent of a higher interest rate on loans and bonds; the investor's premium increases the firm's cost of capital.The key importance of EVA lays on the sharp expression to the shareholders and the executive officers, which is drown by the concept of "value-building". And by means of this outstanding target, the CEOs could manage the firm by the core ofreal profit, not of the paper profit.This research paper is designed to evaluate the new measurement of EVA. And another objective is located to test the effectiveness of the apply of EVA, while re-inventing the current financial evaluations. The examination proves that EVA is a more advanced , which is based on the value-building concept, as the main target of leading companies' strategies, than the traditional financial evaluating methods.