Elibrarycom washington mutual web site wwwwamucom

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Unformatted text preview: The Revenue Revolution at Washington Mutual,” CFO, October 2001, downloaded from www.cfo.com; “Washington Mutual Profits Rise 84 Percent,” October 16, 2001, Reuters Business Report, downloaded from eLibrary, ask.elibrary.com; Washington Mutual Web site, www.wamu.com. firm’s future returns (cash flows), often appear to affect share price. Two important issues related to maximizing share price are economic value added (EVA®) and the focus on stakeholders. Economic Value Added (EVA®) economic value added (EVA®) A popular measure used by many firms to determine whether an investment contributes positively to the owners’ wealth; calculated by subtracting the cost of funds used to finance an investment from its after-tax operating profits. Economic value added (EVA®) is a popular measure used by many firms to determine whether an investment—proposed or existing—contributes positively to the owners’ wealth.3 EVA® is calculated by subtracting the cost of funds used to finance an investment from its after-tax operating profits. Investments with positive EVA®s increase shareholder value and those with negative EVA®s reduce shareholder value. Clearly, only those investments with positive EVA®s are desirable. For example, the EVA® of an investment with after-tax operating profits of $410,000 and associated financing costs of $375,000 would be $35,000 (i.e., $410,000 $375,000). Because this EVA® is positive, the investment is expected to increase owner wealth and is therefore acceptable. (EVA®-type models are discussed in greater detail as part of the coverage of stock valuation in Chapter 7.) 3. For a good summary of economic value added (EVA®), see Shaun Tully, “The Real Key to Creating Wealth,” Fortune (September 20, 1993), pp. 38–49. CHAPTER 1 The Role and Environment of Managerial Finance 17 What About Stakeholders? stakeholders Groups such as employees, customers, suppliers, creditors, owners, and others who have a direct economic link to the firm. Although maximization of shareholder wealth i...
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