AN EM PI RI CAL ANALYSI S OF LI NKAGE BETWEEN ECONOM I C VALUE

ADDED (EVA) AND M ARKET VALUE ADDED (M VA)

Dr. C. Viswanatha Reddy

Associate Professor,
Dept. of Business Administration
Sree Vidyanikethan Institute of Management,
A.Rangampet-517 102, Tirupati, A.P., INDIA.
Mobile: 9848263463; e-mail: [email protected]
 AN EM PI RI CAL ANALYSI S OF LI NKAGE BETWEEN ECONOM I C VALUE
ADDED (EVA) AND M ARKET VALUE ADDED (M VA)
Abstract:
Maximizing shareholder value has become the new corporate paradigm. Corporations in
world wide have started disclosing EVA information from the beginning of 90s as a measure of
corporate performance. It is believed that market value of a firm (i.e., the shareholders’ wealth)
would increase with the increase in EVA. Many studies conducted in US and India also confirmed this
belief. EVA is a residual income that subtracts the cost of capital from the operating profits generated
by a business. The present study makes an attempt to find the relevance of Stewart's claim that market
value of the firm is largely driven by its EVA generating capacity in the Indian context. Based on the
data from the annual reports of Dr Reddy’ s laboratories Ltd, over a period of five years, the study
shows that market value of a firm can be well predicted by estimated future EVA streams. The study
has also found that market value of the firm is explained more by current operational value than
future growth value of the company.
Key Words: Weighted Average Cost of Capital, NOPAT, EVA, MVA
JEL Classification: G30
Introduction:
Today, one of the major goals of any firm is the maximum utilization of capital
employed. Since capital resources are scarce and costly, companies should try to employ
these resources in a way that yield highest return. Of course this should be accompanied by
the steps taken to minimize the cost of acquired resources. Otherwise, it will not increase the
shareholders wealth and firm’s value.
The manager of a firm (as an internal user of financial information), the investors and
other parties (as the external users) are interested to use an appropriate performance measure
in order to assess how the managerial actions affect the value of the firm. For this purpose,
the performance measures used, must consider at least three things, which are:
 The amount of capital invested,
 The return earned on the capital, and
 The cost of capital (Weighted Average Cost of Capital).
Economic Value Added (EVA) has been used as an indicator of corporate managerial
performance evaluation on the basis accounting information and much more than just a
measure of performance and it is a framework for complete financial management.
On the other hand, Market Value Added (MVA) is an indicator which measures the
stock return and shows the effect of different factors on share price, in a particular market.
While EVA is an accounting-based measure for the corporate performance of one year, MVA
is a market-generated number. MVA is cumulative measure of the value created by the
management in excess of the capital invested.
The EVA analysis has attracted much attention in both as a management innovation
as well as a stock market analysis. The recognition of such a technique in India context,
nevertheless, shows to some extent, diverse trend. Majority of companies are still not
prepared to put in the EVA technique for evaluating their financial performance. But, in a
country like India where capital is still costly, one would think, that corporate management
will try to get a bigger return from every rupee invested in the business. This will happen if
the new performance measure, EVA is utilized.
Definition of EVA
EVA essentially seeks to measure a company's actual rate of return as against the
required rate of return. To put it simply, EVA is the difference between Net Operating Profit
after Tax (NOPAT) and the capital charge for both debt and equity (overall cost of capital). If
NOPAT exceeds the capital charge, EVA is positive and if NOPAT is less than capital
charge, EVA is negative. The definition of EVA can be mathematically shown as below:
EVA = NOPAT- Capital Charge............. (1)
= NOPAT- (WACC * Invested Capital)
= (r * Invested Capital) - (c * Invested Capital)
EVA = (r-c) * Invested Capital
EVA t = (r-c) * Invested Capital (M)................... (2)
Where,
WACC = Weighted Average Cost of Capital
Invested Capital = Invested Capital at the Beginning of the Year
r = NOPAT/Invested Capital
c = WACC
t = Time Period
Cost of funds is an important criterion of resource mobilization to bring a reasonable
spread between cost and return. The methods of calculating the cost of funds is similar to the
methods followed by other corporate bodies.
The cost of equity share capital is calculated by using CAPM:
Return on risk-free investment + expected risk premium on equity investment adjusted for the
beta variant.
Ke = Rf + βi(Rm-Rf)
Ke =Cost of equity
Rf =Risk-free rate of return (10 year G-Sec yield taken as the Rf of investment)
βi = Systematic risk coefficient
Rm = Market Risk Premium
The cost of bond financing and shows the year-wise trend in after tax cost of bond
financing which is denoted by Kb. It depends on the rate of fixed interest offered to the
debenture holders. In order to measure the cost of bond financing we may follow the
following equation:
 ( I + Fc)
Kb = x 100 , where
A
I = Interest Charges
Fc = Floatation Charges
A = Sale Proceeds of the Bonds
The formula for calculation of after tax cost of bonds is
K d = K b (1 − t )
Where; t = tax rate which is equal to 50 per cent.

The weighted average index indicates precisely the amount of cost incurred on an
average for every `.100 of funds raised by the company. The weighted average cost of capital
is calculated by solving the following equation.
n
K0 = ∑K
S =1
s * Ws , where

Ks = the after tax cost of a source of funds,

Ws = the weighted, being the proportion of respective sources in total funds,
n = Number of sources,
K0 = Weighted average cost of capital.
In the case of the APSFC, the Weighted Average Cost of Capital is calculated as follows:
K0 = Ke*We + Kb*Wb
Where,
Ke = Cost of equity financing,
Ke = Cost of Term Loans from Banks.
We = The proportion of equity in total funds,
Wb = The proportion of debt funds in total funds,
The spread (r-c) shows whether a company has earned a return from its business that
is more than its total cost of capital. If the spread is positive, EVA would also be positive.
The logic for taking beginning invested capital for calculating periodic EVA is that a
company would at least take a year's time to earn a return on investment. Given a particular
level of spread, EVA would depend on the beginning invested capital. Given a particular
level of invested are two factors that drive EVA — the spread and the invested capital. The
spread denotes the relative profitability and invested capital denotes the size or growth. If a
company has negative profitability (i.e., spread), growth in size would reduce EVA. To
reduce the impact of negative EVA, invested capital should be economized. On the other
hand, if the spread is positive, growth in firm size would indicate higher EVA. However, it is
true that for skill-based companies (e.g., companies in the Information Technology sector)
growth does not involve commensurate increase in invested capital. This may prompt some
people to conclude that EVA would not be a useful variable to explain stock price
movements of a research-based or skill-driven company.
EVA Methodology:
For the purpose of calculating EVA, information is required regarding the profits,
capital, cost of capital, etc., which are based on the mission and objectives of an organization.
The EVA, in turn, is linked with various plans formed for each particular action and defines
the measures to be applied for achieving the value creation objective. These measures are
defined for each activity: profits, capital invested and cost of capital.

The study of the above mentioned EVA methodology helps in identifying the drivers
for value creation in an organization. The segregation of all the financial and non-financial
components helps in identifying the drivers of value creation and value enhancement in a
company.
Regular Vs. EVA Balance Sheet
Regular Balance Sheet EVA Balance Sheet
Net Assets Sources of Finance Net Assets Sources of Finance
Cash Short-term Debt Non-Operating Cash Short- term Debt
Receivables + Short-term Interest Bearing
Working Capital
Inventories + Liabilities Long-term Debt
Requirements
Prepaid Expenses Long-term Debt
Other Long-term
Other Long-term Liabilities
Liabilities
Fixed Assets Fixed Assets
Shareholder’s
Shareholder’s Equity
Equity
Definition of Market Value Added:
Stewart (1991) defines MVA as the excess of market value of capital (both debt and
equity) over its book value. If MVA is positive, the company has created wealth for its
shareholders. To determine the market value, equity is taken at the market price on the date
the calculation is made, and debt is taken at book value. The total investment in the company,
since day one, is then calculated as interest-bearing debt and equity including the retained
earnings. Present market value is then compared with total investment. If the latter is greater
than the former, the company has created wealth.
Implications of MVA

Positive or High MVA Negative or Low MVA

Company has Company has lost value

added value

EVA and MVA - Relationship:

EVA theory simply emphasizes that earning a return greater than the cost of capital
increases the value of a company and earning less than the cost of capital decreases the value.
EVA tells us how much value the market adds over the book value of invested capital. MVA,
therefore, denotes the confidence of the capital market on the performance of the company.
The relationship between EVA and MVA is expressed as follows:
Market Value Added (MVA) = (Market Value of Equity + Market Value of Debt) – (Book
Value Equity + Book Value of Debt) -------- (3)
We may also write the equation (3) as
Market Value Added (MVA) = Present Value of Future Stream of EVAs ----------- (4)
From (Eq.3) and (Eq.4), we can write
Market Value = Book Value of Invested Capital + Present Value of Future Stream of EVAs
------- (5)
The relationship between EVA and MVA (as explained in equation 5) is derived from
Modigliani and Miller’ s (1961) basic equation on market value of the firm. This is explained
as follows
∞
(X t − It )
MVo = ∑ ------------ (6)
t =0 (1 + c) t +1
MVo = Total market (Debt plus Equity) value of the firm,
 Xt = NOPAT at the end of year t,
I t = New investment at the end of year t,
c = the cost of capital.
Basically, MVA is nothing but present value of future expected EVAs.
EVA and its Link with MVA

Review of Literature:
Ashok Banerjee (2000) has proved that there exists a huge gap in many cases between
actual market value and the sum total of COV and FGV. A longer time horizon and
calculation of FGV on the basis of expected future EVAs might produce a better relationship
between FGV and market value. The market capitalization factors in a longer time horizon
and capilatizes the growth potential of a firm during the future period. He has not attempted
to estimate future EVAs simply because that exercise would involve more assumptions.
Lehn and Makhija (1996) in their study of 241 US companies over two periods (1987-
1988 and 1992-1993) observed that both measures (EVA and MVA) correlate positively with
stock returns and that the correlation is slightly better with EVA than that with traditional
performance measures like return on assets (ROA), return on equity (ROE), etc.
Stewart (1991) has first studied the relationship with market data of 618 US
companies. Stewart observed that the relationship between EVA and MVA is highly
correlated among US companies.
Statement of the Problem:
Optimum utilization of capital employed and maximizing shareholder value have become
the new corporate paradigm. Since capital resources are scarce and costly, companies should try
to employ these resources in a way that yield highest return. This should be accompanied by
the steps taken to minimize the cost of acquired resources. Otherwise, it will not increase the
shareholders wealth and firm’s value. The manager of a firm (as an internal user of financial
information), the investors and other parties (as the external users) are interested to use an
appropriate performance measure in order to assess how the managerial actions affect the
value of the firm. For this purpose, the performance measures used, must consider at least
three things, viz., the amount of capital invested, the return earned on the capital, and the
weighted average cost of capital. The performance measure, Economic value Added (EVA)
and Market Value Added (MVA) are being increasingly adopted by more and more firms and
is beginning to appear in the mainstream of financial management literature. Corporations in
world wide have started disclosing EVA information from the beginning of 90s as a measure of
corporate performance. It is believed that market value of a firm (i.e., the shareholders’ wealth) would
increase with the increase in EVA. Many studies conducted in various countries also confirmed it.
EVA is a residual income that subtracts the cost of capital from the operating profits generated by a
business. On the other hand, MVA is an indicator which measures the stock return and shows
the effect of different factors on share price, in a particular market. The EVA is the internal
measure of corporate performance and MVA is the external measure of corporate performance. MVA
reflects how much the capital market is putting value on the invested capital. The present study makes
an attempt to find the relevance of Stewart's claim that market value of the firm is largely driven by its
EVA generating capacity in the Indian context. Based on the data from the annual reports of Dr
Reddy’ s laboratories Ltd, over a period of 10 years, the study shows that market value of a firm can
be well predicted by estimated future EVA streams. The study has also found that market value of the
firm is explained more by current operational value than future growth value of the company.
Objectives of the study:
The objectives of the study are as follows:
1. To calculate the Economic Value Added by Dr Reddy’ s Laboratories Ltd.
2. To find out the Market Value Added by Dr Reddy’ s Laboratories Ltd.
3. To examine whether the market value of a firm is best predicted by expected EVAs.
4. To study the Relationship between Dr Reddy’ s Economic Value Added and Market
Value Added.
Research Methodology:
Research design:
In view of the objectives of the study listed above an exploratory research design has
been adopted. Exploratory research is one which largely interprets the already available
information and it lays particular emphasis on analysis and interpretation of the existing and
available information and it makes use of secondary data.
Sources of data:
The study is based on secondary data. The secondary data consists the annual reports
of Dr Reddy’s Laboratories Ltd, ranging for the last 10 years. Various other sources like
journals, magazines, published books and web sites.
Hypothesis of the Study:
Based on the previous studies and the statement of the problem of the study, the
following hypothesis is developed.
H0: There is no statistical relationship between Economic Value Added and Economic Value
Added by the company during different financial years.
Tools of Analysis:
The data collected for the study has analyzed logically and meaningfully to arrive at
logical and meaningful conclusions. The financial tools applied for data analysis are Return
on Equity, Earnings per Share, Retention Ratio, Growth in Share, Cost of equity, Cost of
retained earnings, Weighted Average cost of capital, Cost of capital employed, Net operating
profit after tax, Economic value added, Market value added.
Scope and period of the study:
The scope of the study is defined below in terms of concepts adopted and period
under focus. First the study of the relationship between EVA and MVA is confined to only to
the Dr Reddy’s Laboratories Ltd., Limited. Secondly, the binary concepts of the relationship
between EVA and MVA are used for measuring profitability and liquidity respectively and
also to arrive at various objectives of the study. Thirdly, the study is based on the annual
reports of the company for a period of 5 years from 2003-04 to 2012-13. Thus on the whole
the purpose of the present paper is to analyze the past and present performance of company
on various financial areas like:
1. Earnings per share
2. Cost of Equity and Debt
3. Overall cost of Capital
4. EVA & MVA
Limitations of the Study:
The information used is primarily from historical annual reports available to the
public and the same doesn’t indicate the current situation of Dr Reddy’s Labs Ltd. Detailed
analysis could not be carried for the research work because of the limited time span.
Data Analysis and Interpretation:
Trends in Capital Employed and NOPAT:
Equity in the case of Dr Reddy’s Labs Ltd mainly consists of paid-up share capital
and reserves and surpluses. The debt consists of long-term borrowings, deferred tax liabilities
(net), other long-term liabilities and long-term provisions. The data concerning to equity,
debt, total capital employed, earnings before interest and tax and NOPAT of Dr Reddy’s
Laboratories Ltd is depicted in Table No.1
Table No.1
Capital employed and NOPAT position of Dr Reddy’s Laboratories Ltd.
(`. in millions)
Year Equity Debt Capital Earnings before Tax on NOPAT
(1) (2) (3) Employed Interest & Tax – EBIT 7 = (5-6)
4=(2+3) EBIT (5) (6)
2003-04 21,039 31 21,070 2,555 205 2,350
2004-05 20,953 25 20,973 173 2 171
2005-06 22,272 19 22,291 2,186 363 1,823
2006-07 41,578 21,541 63,119 11,555 2,510 9,045
2007-08 49,428 14,679 64,107 6,128 1,186 4,942
2008-09 44,698 14,061 58,759 10,015 2,695 7,321
2009-10 42,480 11,362 53,842 11,403 2,315 9,088
2010-11 44,453 7,187 51,640 11,919 1,298 10,621
2011-12 51,717 10,825 62,542 19,547 4,457 14,992
2102-13 63,691 14,593 78,284 21,676 4,900 16,776
Note: 1. Taxes on EBIT calculated at the Effective Tax Rate.
2. All the calculations are based on IFRS Consolidated Financials.
Source: Compiled from the Annual Reports of Dr. Reddy’s Labs Ltd.,
From the data provided in the table, the following observations can be made.
1. The equity of Dr Reddy’s Labs Ltd has gradually increased from `.21,039 millions in
2003-04 accounting for 99 per cent to the capital employed to `.63,691 millions in
2012-13 accounting for 81 per cent indicating the better equity position.
2. The proportion of debt in the capital employed has increased from 1 per cent in 2003-
04 to 18 per cent in 2012-13.
3. The EBIT of Dr Reddy’s Laboratories Ltd has also shown a positive trend during the
study period. The EBIT has increased from `.2,555 millions in 2003-04 to `.21,676
millions in 2012-13.
4. The NOPAT of Dr Reddy’s Laboratories Ltd has also gained momentum from `.2,350
millions in 2003-04 to `.16,776 millions in 2012-13.
Trends in Weighted Average Cost of Capital (WACC):
The weighted average cost indicates precisely the amount of cost incurred on an
average for every `.100 of funds raised by the Company in resource mobilization. In the
calculation of weighted average cost of capital, the after tax cost of various sources of funds
is taken into consideration. The weights being assigned their proportion in total funds have
been taken into account and assumed that the sum of weights is equal to 100 per cent. The
higher the value of weighted cost of funds the lower the efficiency in management of
liabilities or vice-versa. The computed values of weighted average cost of capital for the 10
years period is incorporated in Table No.2.
Table No.2
Calculation of Weighted Average Cost of Capital
Year Kd Wd Ke We Ko
2003-04 1.9 0.01 10.8 0.99 10.8
2004-05 2.3 0.01 12.3 0.99 12.3
2005-06 2.1 0.01 13.7 0.99 13.7
2006-07 3.4 0.35 13.8 0.65 10.7
2007-08 3.6 0.22 11.7 0.77 9.8
2008-09 3.0 0.23 9.0 0.76 8.0
2009-10 2.0 0.21 12.0 0.78 9.0
2010-11 6.0 0.14 12.0 0.86 11.0
2011-12 7.0 0.17 11.0 0.83 10.0
2102-13 7.0 0.18 12.0 0.81 11.0
Note: 1. The cost of equity is calculated by using the following formula: Return on risk-free investment + expected risk
premium on equity investment adjusted for the beta variant for Dr. Reddy’s in India.
2. 10 year G-Sec yield taken as the risk-free rate of investment
Source: Compiled from the Annual Reports of Dr. Reddy’s Labs Ltd.,
It can be noted from the table that during the study period the weighted average cost
of capital has increased from 10.8 per cent in 2003-04 to 13.7 per cent in 2005-06 and
declined to 8.0 per cent in 2008-09. Further, it has increased to 11.0 per cent in 2012-13. As
long as the weighted cost is below the return on investment to leave some spread between
cost and return, the company can be considered efficient in the management of its liabilities.
It can, therefore, be concluded that though there is a small rise in the weighted cost, the
efficiency of Dr Reddy’s Laboratories Ltd the management of liabilities during the study
period is satisfactory.
Trends in Economic Value Added:
EVA is the difference between Net Operating Profit after Tax (NOPAT) and the
weighted average cost of capital. If NOPAT exceeds the capital charge, EVA is positive and
if NOPAT is less than capital charge, EVA is negative. The EVA made by Dr Reddy’ s
Laboratories Ltd is depicted in Table No.3.
Table No.3
Calculation of Economic Value Added
(`. in millions)
Weighted Capital Charges
Capital Economic
= [[Col.3 * Col.4] / 100]
Year NOPAT Average Cost
Employed Value Added
(1) (2) of Capital (Ko)
(3) (5) 6 = (2-5)
(4)
2003-04 2,350 21,070 10.8 2,269 80
2004-05 171 20,973 12.3 2,571 (2,400)
2005-06 1,823 22,291 13.7 3,052 (1,229)
2006-07 9,045 63,119 10.7 6,475 2,570
2007-08 4,942 64,107 9.8 6,309 (1,367)
2008-09 7,321 58,759 8.0 4,512 2,809
2009-10 9,088 53,842 9.0 5,084 4,005
2010-11 10,621 51,640 11.0 5,729 4,892
2011-12 14,992 62,542 10.0 6,460 8,631
2102-13 16,776 78,284 11.0 8,611 8,165
Note: Calculations are made using MS Excel.
Source: Compiled from the Annual Reports of Dr. Reddy’s Labs Ltd.
It is clear from the above table that the Economic Value Added by Dr Reddy’s
Laboratories Ltd has been widely fluctuating during the first half of the study period. The
amount of Economic Value Added has declined from `.80 millions in 2003-04 to `.2,400
millions in 2004-05 and thereafter raised to `.2,570 millions in 2006-07. Further, the same
has declined to `.1,367 millions in 2007-08 and again raised to `.8,165 millions in 2012-13.
The Economic Value Added by Dr Reddy’s Laboratories Ltd over the study period is
depicted in the following figure 1.

Trends in Market Value Added:

MVA is the excess of market value of capital over its book value. If MVA is positive,
the company has created wealth for its shareholders. The data relating to MVA made by Dr
Reddy’ s Laboratories Ltd during the study period is depicted in Table No.4.
Table No.4
Calculation of Market Value Added
(`. in millions)
No. of Average Market
Book Value Market
Year Shares of Closing Value of
of Equity Value Added
Outstanding Price Equity
2003-04 76,518,949 1052.07 80,503.29 21,070 59,433.29
2004-05 76,518,949 747.45 57,194.08 20,973 36,221.08
2005-06 76,694,570 1401.50 1,07,487.44 22,291 85,196.44
2006-07 167,912,180 671.47 1,12,747.99 63,119 49,628.99
2007-08 168,172,746 555.50 93,419.96 64,107 29,312.96
2008-09 168,468,777 426.00 71,767.70 58,759 13,008.70
 2009-10 168,845,385 1224.45 2,06,742.73 53,842 1,52,900.73
2010-11 169,252,732 1583.50 2,68,011.70 51,640 2,16,371.70
2011-12 169,560,346 1701.02 2,88,425.54 62,542 2,25,883.54
2102-13 169,836,475 1782.93 3,02,806.54 78,284 2,24,522.54
Note: 1. The Company issued one equity share for each equity share held by shareholders as bonus on August 30, 2006
2. The record date for bonus issue was August 28, 2006. The price has been adjusted for bonus shares for comparison purpose.
3. The price has been adjusted for bonus shares for comparison purpose.
Source: Compiled from the Annual Reports of Dr. Reddy’s Labs Ltd.

The Market Value Added by Dr Reddy’s Laboratories Ltd has been shown the mixed
trend during the study period. The amount of Market Value Added has increased from
`.59,433.29 millions in 2003-04 to `.85,196.44 millions in 2005-06 and thereafter declined to
`.13,008.70 millions in 2008-09. There are two reasons for such fall, viz., (a) the market
value of the share has declined from `.671.47 in 2006-07 to `.426.00 in 2008-09 and (b) the
Company has issued one equity share for each equity share held by shareholders as bonus on
August 30, 2006 and the price has been adjusted for bonus shares. Further, the MVA has
increased to `.2,24,522.54 millions in 2012-13. The Economic Value Added by Dr Reddy’s
Laboratories Ltd over the study period is depicted in the following figure 2.

Relationship between EVA and MVA:

The coefficient of correlation is used to measures the degree of relationship between
two sets of variables, viz., EVA and MVA over the study period. The reliability of estimates
depends up on the closeness of the relationship between such variables. The value of the
correlation coefficient will be ranging in between +1 and -1.
When r = +1 there is a perfectly positive relationship between the variables.
When r = -1 there is a perfectly negative relationship between the variables.
When r = 0, means there is no relationship between the variables.
Hypothesis Testing:
H0: There is no statistical relationship between Economic Value Added and Economic Value
Added by the company during different financial years.
Table No.5 Correlations between EVA and MVA
Economic Market Value
Value Added Added
Pearson Correlation 1 .833**
Economic
Sig. (2-tailed) .003
Value Added
N 10 10
Pearson Correlation .833** 1
Market Value
Sig. (2-tailed) .003
Added
N 10 10
** Correlation is significant at the 0.01 level (2-tailed).
Source: Calculated using SPSS.

The Pearson correlation is used to test the hypothesis and a significant relationship
was found at 1% level between Economic Value Added and Market Value Added with r =
0.833, which is high and positive. Therefore, there is a statistical relationship between
Economic Value Added and Market Value Added during the period under study.
Suggestions:
 The NOPAT of Dr Reddy’s Laboratories Ltd has gained momentum during the study
period. Since more the NOPAT, more the EVA, Dr Reddy’s Labs is suggested to
maintain the same effort for further improvement in NOPAT, i.e., the management of
the company should try to get higher returns for every rupee invested in the business.
 The weighted average cost of capital has increased from 10.8 per cent in 2003-04 to
11.0 per cent in 2012-13. As long as the weighted cost is below the return on
investment to leave some spread between cost and return, the company can be
considered efficient in the management of its liabilities. It can, therefore, be suggested
to maintain the low weighted cost; which will enable the company to maintain a
sound spread between cost and return.
 Dr Reddy’s Labs is mainly depending on its equity capital with low proportion of debt
in its capital employed. In this context the Dr Reddy’s Labs has to give weightage to
the trading on equity. Moreover, the cost of debt is always cheaper than the cost of
equity. Therefore, it is suggested that the company should employ the debt capital,
which will cause for minimization of overall cost of capital and maximization of
overall profitability.
 MVA is the excess of market value of capital over its book value. If MVA is positive,
the company has created wealth for its shareholders. Hence, Dr Reddy’s Labs should
try to increase the market value of its equity.
  There is a significant statistical relationship between Economic Value Added and
Market Value Added during the period under study. It is observed from the present
study that the EVA is more associated with MVA and presents a more transparent and
clear picture of increase in the market value of the firm.
 Finally, if the bigger is expected EVA, the bigger will be the market value of its
equity stock and the value of the firm. So it is suggested to Dr Reddy’s Labs should
try to improve profitability through the improved capital turnover.
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