BUS601: Financial Management

Shareholders' wealth maximization should be the ultimate goal of most organizations. It is a tentatively rational and operationally viable normative objective for managing financial decision making. Currently, EVA is widely adopted as a performance metric by researchers all over the world whereas the usage of Return on Equity, Net profit, and Return on Assets known as traditional performance metrics has become obsolete. The idea of stockholder value formation is an elementary principle of efficacious financial management. Shareholder value creation can be attained by maximizing the market value of investors' wealth. Establishing market value involves the procedure of valuation. Determining value and value drivers is crucial to evaluate an investment regarding whether it is sound or not. In this analysis, the leverage effect on MVA, and the effect of EVA on MVA is investigated. Total leverage can be derived by multiplying financial leverage by operational leverage. It would be possible to forecast what impact the leverage will have on MVA as soon as the total leverage is determined. The conclusions of this study could be valuable not only to financial managers but also to managers at all levels of a business. Furthermore, potential and existing shareholders can get to know the worth of their investments made in the organization.

1.1 Objectives of the Study

The objectives are directed towards the following:

• To identify the association between leverage, EVA, and MVA;
• To discover the effects of leverage and EVA on MVA.

1.2 Hypotheses of the Study

Following hypotheses were formulated for the study.

H₁: - There is a significant relationship between EVA and MVA;

H₂: - Total leverage exhibits a significant relationship with MVA;

H₃: - There is a significant impact of EVA on MVA;

H₄: - Total leverage is having a profound impact on MVA.