Economic Value Added as a Dependence on the Corporate- and Market-life Cycle
Konečný Zdeněk
Keywords:
alternate cost of equity, corporate life cycle, economic value added, market life cycle, return on equity,
spread
Abstract:
Economic value added (EVA) is an indicator which is widely used as the main tool for financial
analysis. There are two methods of calculating it. The original method which was made by
Stern & Stewart is defined as the net operating profit after taxes minus the cost of capital. The
second method which was developed and used by the “Czech Ministry of Industry and Trade”
indicates that, the economic value added is the difference between return on equity and the
alternate cost of equity that is composed of separate risk rewards, and this “spread” is consequently
multiplied by the equity. Economic value added depends on many factors. Whereas
some of them are controllable by the company, others are not. This article is focused on the
relationship between economic value added and the corporate- vs. market life cycle. This is
because, there is an assumption that conditions for developing EVA changes depending on the
actual phase of corporate- and market life cycle. In this research, the model by Reiners (2004)
is used to identify the phases of corporate- and market life cycle and the method provided
by the “Czech Ministry of Industry and Trade” is used to calculate EVA. However, there is a
consideration of the relativity of EVA in the form of “spread” because of the intercompany
comparison. The study found that, the highest spread is achieved by companies that are in the
phase of expansion and phase of market expansion. On the contrary, companies in the phase
of declension during market declension achieved the lowest and negative spread.
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