To better align managers interests with Shareholders - the EVA framework needs to be holistically applied in an integrated approach - simply measuring EVAs is not enough it must also become the basis of key management decisions as well as be linked to senior management's variable compensation (b) Economic Value Added (EVA) is primarily a benchmark to measure earnings efficiency. EVA as a residual income measure of financial performance is simply the operating profit after tax less a charge for the capital employed, equity as well as debt, used in the business. Mathematically EVA= OPBT Tax - (TCE X COC) Where: 27 OPBT - Opening Profit Before Tax TCE = Total Capital Employed COC = Cost of Control n27 Because EVA includes both profit and loss as well as balance sheet efficiency as well as the opportunity cost of investor capital - it is better linked to changes in shareholders wealth and is superior to traditional financial measures such as PAT or percentage of return measures such as ROCE or ROE. EVA, additionally, is a tool for management to focus on the impact of their decisions in increasing shareholders wealth. These include both strategic decisions such as what investments to make, which business to exit, what financing structure is optimal; as well as operational decisions involving trade- offs between profit and asset efficiency such as whether to make inhouse or outsource, repair or replace an equipment, whether to make short or long production runs etc. Most importantly the real key to increasing shareholders wealth is to integrate EVA framework in four key areas, viz., to measure business performance, to guide managerial decision making, to align managerial incentives with the shareholders' interests and to improve the financial and business literacy throughout the organisation. To better align managers interests with shareholders' - the EVA framework needs to be holistically applied in an integrated approach - simply measuring EVA is not enough; it must also become the basis of key management decisions as well as be linked to senior management's variable compensation. However, EVA as a strategic tool has the following limitations: 1. Not easy to use; too complicated for small businesses. 2. Recommends inexpensive debts in order to reduce the cost of capital. 3. A passive tool, measures past performance, Q. 37. The following information is available of a concern; calculate E.V.A: Debt capital 12% Rs. 2,000 crores Equity capital Rs. 500 crores Reserve and surplus Rs. 7,500 crores Capital employed Rs. 10,000 crores Risk-free rate 9% Beta factor 1.05 Market rate of return 19% Equity (market) risk premium 10% Operating profit after tax Rs.2,100 crores Tax rate 30%