EVA Basic Premise

• Managers are obliged to create value for their investors
• Investors invest money in a company because they expect returns
• There is a minimum level of profitability expected from investors, called capital charge
• Capital charge is the average equity return on equity markets; investors can achieve this return easily with diversified, long-term equity market investment
• Thus creating less return (in the long run) than the capital charge is economically not acceptable (especially from shareholders perspective)
• Investors can also take their money away from the firm since they have other investment alternatives