Question

In the Stern Stewart approach to value based management, the net annual benefit to shareholders is:

A. Total invested capital (CAPITAL).

B. Economic Value Added (EVA).

C. Market Value Added (MVA).

D. Net Operating Profit After Tax (NOPAT).

Answer 1

Answer:

As per Stern Stewart Approach to value based management, the net annual benefit to shareholders is  Economic Value Added (EVA).

Economic value added (EVA) is based on a very simple concept; if any investment achieves a return that is more than the investor requires then value has been added to the investment. The magnitude of the added value is the difference between what is achieved and what is required. For example, say a company can raise capital at 11% to fund investment in a new production plant but actually achieves a return of 12% from the plant, then value would have been added.

The magnitude of the value added in each year is the product of the premium return, 1% (12% - 11%), and the invested capital (invested capital is simply capital employed with some adjustments). Thus, EVA is simply expressed as follows: Economic value added = (actual return - required return) × invested capital. The returns delivered by a company vary each year and so too does EVA; therefore, it is calculated on an annual basis. The development of the concept of economic value added (EVA) is usually attributed to Stern Stewart & Co in the early 1990s although, many years earlier, Rappaport and others talked of a shareholder value concept that was similar.

Conclusion:

As per Stern Stewart & Co to value based management for the net annual benefit to shareholders best Approch is Economic Value Added.

Hence, Answer(B) correct.