Economic Value Added of Nifty 50 Value 20 Index Companies

Abstract

Company valuation methods have been broadly classified into absolute valuation methods and relative valuation methods. Absolute valuation methods include - Discounted Cash Flow Method, Dividend Discount Model, Residual Income Model, Payback Period, Modigliani Miller Model and Economic Value Added Method. Absolute valuation methods are company specific and take growth rate of company, discount rate, terminal value, dividends etc to project the growth of the company. Relative valuation methods compare the variables of the company with the similar company and find out the best company for investment by the investment managers. Relative valuation includes PE ratio, PEG ratio, Dividend Payout Ratio, EPS, Growth Rate, Price to cash flows, EV to EBITDA, ROCE and ROE etc to compare the companies. Various valuation methods have been used by the authors and investment managers to find out the value of the company. As per Warren Buffet, value of company is the present value of future discounted cash flows to the company. Aswath Damodaran and Pablo Farnandez, prominent authors of valuation, has similar consensus with the Warren Buffet, but at the same time they found that 90 to 95 percent valuations are relative valuations. Relative valuations are easy to use and less time consuming. Stern Stewart & Company and various other authors found that EVA is the best method for the valuation of the companies. The claim of Stern Stewart & Company has been rejected by the authors and they found that accounting variable based valuation methods have greater predictive power than EVA.  In this research paper, author is using Economic Value Added method of valuation and tests its relation with the market value of the company. Nifty 50 value 20 Index has been taken as a sample to find the relation of EVA with the market value of the company.

Key Words: Valuation, EVA, Nifty 50 Value 20 Index, NOPAT, WACC, Invested Capital.