Comparision of the similarities and differences between Economic Value Research Paper

Comparision of the similarities and differences between Economic Value Added (EVA) and Residual Income as a measure of corporate performance - Research Paper Example The purpose of this paper is to discuss residual income and economic value addded approach in order to compare and contrast their differennces and similarities. EVA is a concept created by the consulting firm Stern Steward & Company (Keys & Azamhuzjaev & Mackey, 2001). EVA is a wealth metric that is commonly referred too as economic profits. In mathematical terms EVA is calculated by taking net operating profits after tax (NOPAT) and reducing NOPAT by your total cost of capital which includes the combination of borrowing and equity costs (Exinfm, 2009). EVA has become a very popular tool in the corporate world. Many multinational corporations have utilized the concept to increase the value of their common stock. After the inception of EVA Coca-Cola stocks rose 200% from 1987 to 1993; another example is CVX whose stock rose from $28 to $75 in a five year span after adopting EVA (Chen & Dodd, 2001). Despite the these sucesss stories there is not enough emperical evidence to support the claim that adopting the managerial practice to optimize EVA is correlated with price increments in stock valuation. EVA is a concept that is relalative new in c omparison with other financial metrics such as earnings per share (EPS) and residual income. The application of EVA and its support and validity may replace EPS in the future an indicator that is included in the income statements of public corporations.