Economic Value Added $($EVA$)$

$1.$ Compare typical compensation and incentive arrangements for $($a$)$ top management, for example, the CEO or CFO, and $($b$)$ plant or division managers. What are the chief differences? Can you explain them?

Market value added $\backslash (=\backslash )$ market value $-$ book value $----$ STOCK price

$2.$ Assume all plant and division managers were paid only a fixed salary$-$no other incentives or bonuses

a$.$ Describe the agency problems that would appear in capital investment decisions.

b$.$ How would tying the manager's compensation to EVA alleviate these problems?

$3.$ The below Table shows a condensed income statement and balance sheet for AP paper's manufacturing plant $($Rs$.$ in millions$)$

a$.$ Calculate the plant's EVA. Assume the cost of capital is $9$ percent

b$.$ The plant is carried on AP paper's books at Rs$.48\mathrm{.}32$ million. However, it is a modern design and could be sold to another manufacturing company for Rs$.95$ million. How should this fact change your calculations of EVA?

$4.$ Krishna Herbal Resources is a small but profitable producer of dietary supplements for pets. This is not a high$-$tech business, but Herbal's earnings have averaged around Rs$\mathrm{.}1\mathrm{.}2$ million after tax, largely on the strength of its patented enzyme for making cats nonallergenic. The patent has eight years to run, and Herbal has been offered Rs$.4$ million for the patent rights.

Krishna Herbal assets include Rs$.2$ million of working capital and Rs$.8$ million of Fixed Assets. The patent is not shown on Herbal's books. Suppose Herbal's cost of capital is $15$ percent. What is it s EVA?

$5.$ Briefly explain the agency problems likely to be encountered in a firm's capital investment decisions.