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The use of EVA limitations of evaluating the performance of listed companies

Author: JinJunHua From: www.yourpaper.net Posted: 2007-11-20 04:10:35 Read:
Summary of economic value added net operating profit after deducting the operating cost of capital balance. Application of economic value added in China, there are many constraints, underdeveloped capital markets, corporate governance structure is imperfect, the position disclosed in the accounting information to be invalid, the net operating profit after tax and the beginning of invested capital adjustment seems difficult. Therefore, the use of economic value added should be taken with caution.
Keywords economic value added weighted cost of capital is not valid disclosure

Economic value added (eclomic value added, EVA), is a long-term economists a concept called "residual income" or "economic profit". EVA is the net operating profit after deducting operating cost of capital (cost of debt and cost of equity) balance remaining after deducting the cost of capital income. EVA is greater than zero, indicating that enterprises have received more than investors expected rate of return, the enterprise to create value in the current period. With the establishment of the management consulting firm Stern Stewart & (Stern Stewart China), China branch, EVA was officially introduced into China. The company uses this formula ranking of China's listed companies create value. Many Chinese enterprises, such as Baosteel, Tsingtao Brewery is the evaluation used in the performance evaluation of their respective companies. However, EVA theory of the great success in the large foreign companies in China are not necessarily able to achieve great results, there is the problem of how to integrate theory with practice.
The balance of the concept of economic value added expressed as the company's adjusted net operating profit minus the opportunity cost of capital, be expressed as:
(1) NOPATt end adjustments after tax net operating profit WACCt the enterprises in the current weighted average cost of capital, CAPITALt-1 refers to the economic value of the invested capital at the beginning. Departure from the formula below, to talk about the limitations of the EVA theory application in China.
A hard science to obtain (1) WACC
WACC is all cost of debt capital and equity cost of capital weighted cost of this formula as:
WACC = KbWb KsWs (2)
(2), Kb refers to the cost of debt capital, Ks is the capital of equity capital, Wb refers to the proportion of debt capital to total capital, Ws refers to the proportion of equity capital to total capital. Below the above parameters to be discussed.
1.1 About the cost of equity capital Ks
There are three methods of foreign calculate the cost of equity capital Ks in theory.
1.1.1 CAPM model
CAPM model says that the expected return of the equity capital rate:
Ks = Kf beta (Km-Kf) (3)
(3), Kf is the risk-free rate, Km is the expected rate of return on the market portfolio, beta is the stock's beta coefficient.
The key assumptions of this model is there to improve the capital market and all investors have the same expectations and requirements of the capital market in the active state. In this assumption, the non-system for risk is dispersed, there is only systematic risk. China's stock market market information asymmetry, monopoly control over the management of the information, investors are not mature enough, speculative atmosphere, the level of stock prices to a large extent, making the result of speculation, not the Company's operating results a true reflection of the market is weak effect, calculated the beta coefficient of the outstanding shares of the company about its authenticity. Second, China's current stock market equity split, listed companies tradable shares and non-tradable shares of the points, 2/3 of non-tradable shares can not be circulated in the market, the non-tradable shares can not use the CAPM to calculate the cost of capital. Therefore, how to calculate the cost of capital of non-tradable shares worth exploring. Some scholars believe that the accounting beta coefficient calculated cost of equity capital, the accounting measurement indicators (such as return on assets) and the rate of return index of the economy as a whole (for example, the average rate of return of the assets of non-financial firms) in contrast to the latter beta coefficient can be determined for the return of the former, but empirical proof, accounting coefficient can only be a rough estimate of the coefficient on the market. On the other hand, the application of the CAPM model in mature foreign capital market, the risk-free rate and the market rate of return to determine the existence of a strong subjective factors, market rate of return and the expected inflation rate, interest rate and the risk of social investors aversion related to various periods of the expected inflation rate, interest rate and social investors risk aversion. Therefore determine the market rate of return is the point in time of the selected period of time have a great relationship. Determine the risk-free rate, the choice of whether interim or long term government bond interest rate is very subjective, and capital market in China has just started, how to determine the risk-free rate and the market rate of return are worth. good research. I believe that, in our application of the CAPM to calculate the cost of equity capital funds, suspected of mechanically.
1.1.2 DCF model
The principle of this method of calculation, the cost of equity capital as the discount rate of the marginal investor expectations of future dividends per share equal to the present value and the prevailing market price per share. The application of the formula to:
] Po = Di / Ks (4)
(4), Po refers to the current market price per share, Di refers to (i) per share is expected to pay the discount rate, Ks refers to the appropriate discount rate (ie, the cost of equity capital).
This model is the most critical, is required to calculate the expected annual dividend payout ratio. Mature and stable business requirements expected continued growth of the company dividends, and the generally poor performance of China's listed companies usually have one year blue-chip, two-year performance level, three-year placement, the four-year results inferior to say, dividends the release is very unstable. In addition, the dividend policy will be the impact of national policies, such as the year 2000 dividend declining, the company paid cash dividends after 2000 increased year by year since 2000, which may be required with the SFC in the validation of Rights Offering or additional pay more attention to the company's cash dividends recorded, such dividend distribution policy volatility is relatively large, the lack of continuity. In such a chaotic environment, it is expected that the annual per share dividend payout ratio is very difficult. China's listed companies is not suitable to use this formula to calculate the cost of equity capital. the

1.1.3 Pre-tax cost of debt plus risk premium method
According to "the greater the risk, the higher the required rate of return" principle, the equity investment is greater than the risk of debt investments. Therefore, the cost of equity capital is equal to plus a risk premium on the basis of the cost of debt capital. This method considers the expected rate of return of the cost of equity capital:
Ks = Kb RPC (5)
(5), KB refers to the pre-tax cost of debt capital, RPC stock over the expected return of the bond risk premium.
The key to this formula is to determine the stock over the expected return of the bond risk premium. At present, China is in a period of economic transition, the immature development of the securities market regulations are incomplete system, the stock market is very risky, listed companies risk prevention, risk aversion is poor. Uncertainties, especially in the environment of each company to determine expected revenue risk premium is particularly difficult. Therefore the use of this formula does not apply to most of China's listed companies, only a particularly rough estimate.
1.2 About the cost of debt capital
China's corporate bond market is extremely underdeveloped, only a few listed companies bond financing, financing projects is very strict (for example, confined to the country's key construction projects). For this part of the bond financing, the cost is relatively easy to determine. However, most bank loans, credit policy of the National Bank of the gross interest rate has serious policy trends, the credit funds generally flow to the state-owned large and medium-sized enterprises. Most enterprises to bank loans, in addition to the benchmark interest rate to the bank fee for use, but also have to spend a lot of hidden financing costs (such as hospitality, gifts, etc.), these costs are due to various enterprises, and sometimes costs can account for a large proportion. By the policy-oriented rather than market forces determine the flow and distribution of funds, which will inevitably lead to difficult to determine the cost of the loan capital. Stern Stewart & Company in China, the use of EVA, is the use of long-term bank loans benchmark interest rate from 3 to 5 years. EVA bank interest rates to determine the company's cost of debt is not appropriate for the majority of businesses, the evaluation of the performance of these enterprises significance.
1.3 Weighted weights
Stern Stewart & Company weighted weights, respectively, the market value of debt capital and equity capital, compared with the market value of capital is calculated. Debt capital market value substantially equal to its book value, but equity capital because the split share structure and market the previously mentioned non-effective, resulting in a large difference between the company's value and the market value of the company's stock, shares of listed companies are generally overestimated . In recent years the stock market seriously diminished that the value of the stock is grossly overvalued. Therefore, calculate the number of weighted according to the current stock market value is not reasonable. As with the book value or market value weighted average, worth exploring.
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