Strategic Financial Management

INDIAN iNSTITUTE OF MANAGEMENT KOZHIKODE |
Continuing Transformation of Asahi Glass: Implementing EVA |
Decision sheet submission |
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Group 6 |
12/31/2012 |

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Question 1: Based onthe information given in the case, justify how EVA is argued as a tool for maximizing the shareholder's wealth?
The Basic Idea of EVA: equity capital has to earn at least same return as similarlyrisky investments at equity markets.
EVA (economic value added)
EVA = NOPAT – WACC
*Capital Employed
Why EVA?
1. Employees and managers to think and act like shareholders.
2. Company decisionsare aligned with shareholder’s wealth.
3. A financial measure that line managers understand.
4. There is no confusion over multiple goals
Company uses EVA as a measure for resource allocation andperformance evaluation

2003 | Operating profit | Tax* (%) | NOPAT | Assets** | ROI |
Japan | 15,182 | 42 | 8,806 | 800,254 | 1% |
Asia | 26,637 | 30 | 18,749 | 277,194 | 7% |America | 6,280 | 36 | 3,998 | 213,998 | 2% |
Europe | 19,439 | 30 | 13,607 | 317,920 | 4% |
Overseas | 52,236 | 30 | 36,565 | 808,482 | 5% |

Using ROI criteria Asia shouldhave maximum investment.

  | Operating profit | Tax (%) | NOPAT | Assets | WACC | EVA |
Japan | 15,182 | 42 | 8,806 | 800,254 | 7% | (47,212) |
Asia | 26,637 | 30 | 18,749 |277,194 | 12% | (13,590) |
America | 6,280 | 36 | 3,998 | 213,998 | 11% | (19,542) |
Europe | 19,439 | 30 | 13,607 | 317,920 | 10% | (17,390) |
Overseas | 52,236 | 30 |36,565 | 808,482 | 7% | (20,029) |

High ROI is related to high WACC
Even if Japan seems to destroy value Investments in whole Japan cannot be decreased.
* Average tax rate used where data wasmissing
** Asset base is assumed to be capital employed

2003 | Operating profit | Tax (%) | NOPAT | Assets | WACC | EVA |
Glass | 37,776 | 38 | 23,421 | 835,397 | 8% | (43,411) |...