Economic Value Added by Bhattacharya and Phani:Key Pointers: The main purpose of this article is to design a robust performance metric for a business which is informative to the shareholders and provide them relevant information whether to invest or not. It should be linked to market valuation. Also it should bring in alignment between the interests of the managers and shareholders so that the managers do not have a self-interest and their interests is aligned to increase the profitability of business and also to interests of shareholders. Economic value added is one such measure but its calculations involve a lot of subjectivity(because macroeconomic changes also influence prices of shares and it is not possible to capture that) so that is why it is losing its value. The other problem is now EVA is reported externally so it might mislead the investors due to its misleading values.What is EVA?It is Economic Value added which is given by:(Net operating profit after tax- cost of capital)*capital employed or (Rate of return cost of capital)*capital.1. What is the main aim of business entity? Maximize the wealth of shareholders2. Explain the various theories which illustrate this:

Organization TheoryIt says firm is not a single simple entity but it is a complex organization with multiple individuals. A firm has an organization structure with multiple departments and units.

Transaction cost view by Robert CoaseIt says that a firm can be competitive( i.e. generates surplus revenue ) only when its transaction costs between buyers and sellers is minimized. Ineconomicsand related disciplines, atransaction costis acostincurred in making an economic exchange (restated: the cost of participating in a market).[1]Transaction costs can be divided into three broad categories:[2] Search and information costsare costs such as those incurred in determining that the required good is available on the market, which has the lowest price, etc. Bargaining costsare the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriatecontractand so on. Ingame theorythis is analyzed for instance in thegame of chicken. On asset markets and inmarket microstructure, the transaction cost is some function of the distance between thebid and ask. Policing and enforcement costsare the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through thelegal system) if this turns out not to be the case.For example, the buyer of a used car faces a variety of different transaction costs. The search costs are the costs of finding a car and determining the car's condition. The bargaining costs are the costs of negotiating a price with the seller. The policing and enforcement costs are the costs of ensuring that the seller delivers the car in the promised condition.

Network TheoryBusiness entity is not an isolated entity but is a part of social relationships( In an Organisation people are involved in social relationships like friendships)

Knowledge TheoryIn an organization low incentives based on group effort inspires individuals to share their knowledge and foster co-ordination and teamwork rather than an environment in which few people with specialist knowledge become opportunistic due to high incentives.

Agency TheoryIt is necessary to monitor managers otherwise they will start acting in self interest which is not aligned with the interests of shareholders.

Stewardship TheoryManagers interest is aligned with that of shareholders unless their position is threatened by mergers acquisition and takeovers.

Resource TheoryOptimum utilisation of resources by a firm leads to competitive advantage!

How are firms aligning the interests of shareholders and managers to check that managers do not act in self-interest and also maintain the success of business entity?By designing incentives.( It is said that variable checks information asymmetry and avoids shirking from work).By efficient networkingBy reducing transaction costsOptimum utilization of resources in the face of uncertainty.What is the necessity for a measure of performance?Investors always want to measure the performance of a firm to see whether they should invest in it or not. To check that managers interest lies in the firms interest managers incentives is linked with the firms performance (like Marginal Revenue etc.). It is also done to achieve alignment between managers and shareholders/investors interest in the firm.When does a firm create value?A firm creates value when its return is higher than cost of capital or when it is able to generate surplus above cost of capital.What is cost of capital?Cost of capital also called Weighed average cost of capital (WACC) which is weighed average of debt and equity. Cost of capital = cost of equity x proportion of equity + cost of debt (1-tax rate) xProportion of debt in the capital. Capital is not all capital but all assets minus non-interest bearing current liabilities.Now what is the problem with this measure?It captures the current performance but does not capture the future prospects. A metric should be designed to provide better information to investors.