CORPORATE SOCIAL RESPONSIBILITY

BASIC OBJECTIVE OF THE FIRM An example of RIL & RPL: The above two companies were formed by Dhirubhai Ambani, who was a dreamer, to begin with he wanted his firms to achieve the following: Operation of business on a massive scale World-class product quality Very reasonable product pricing Top-class care of shareholders through high annual dividend/bonus shares payouts at frequent intervals. The lessons that can be learnt from RIL are as follows: The shareholders must be taken care of, and this must be reflected in the form of high dividend payouts or bonus shares, year after year on sustained basis. Satisfaction of the customers must be guaranteed by providing good quality products at reasonable prices and locations conveniently accessible to them ACCOUNTING PROFIT vs EVA The traditional method of judging the effiency of a firm was the net profit generated by the firm during the accounting year. But gradually it was realized by the finance experts that the accounting profit does not convey or portray the true contribution made by the firm, mainly due to the fact that the cost of equity is not shown or accounted for in the P & L account.

Year on year the cost of debt is done but never of equity. OBJECTIVES OF A FIRM The objectives provide a framework for formulating an action plan for achieving the goal within the given framework of the period. An example of Ranbaxy Laboratories Ltd.: Mission To become a research-based International Pharmaceutical Company. Values Achieving customer satisfaction is fundamental to our business Provide products and services of the highest quality Practice dignity and equity in relationships and provide opportunities for our people to realize their full potential Ensure profitable growth and enhance wealth of the shareholders Foster mutually beneficial relations with all business partners Manage our operations with high concern for safety and environment Be a responsible corporate citizen SHAREHOLDERS WEALTH The capacity of a firm to create shareholders wealth can be measured with the help of anyone of the financial tools: Economic Value Addition (EVA) Market Value Addition (MVA)

ECONOMIC VALUE ADDITION (EVA) It is basically an economic concept based on the opportunity cost of capital, where the later is defined as the expected earnings in the next best employment. For e.g., Rs 100 can earn 8% per annum if kept as deposit in a bank for one year; but if the same is invested in capital market, the chances of earning a dividend of 15% may be quite feasible. Thus, the opportunity cost of earning 15% in capital market in this example is the 8% which the investor would be forgoing to earn 15% dividend. Hence, the difference between 15% and 8% would be known as economic value added. Thus, it can be expressed as: EVA = Expected Rate of Return (EROR) Opportunity Cost of Capital. * Positive EVA is possible only when EROR is greater than the opportunity cost of capital. The shareholders EVA may be defined as the return earned by the company in excess of the minimum expected rate of return of the shareholders. It is calculated as follows: EVA = (EBIT TAXES) Cost of Capital Employed Where, Cost of Capital Employed = Weighted Average Cost of Capital Other ways of calculating EVA are: EVA = Net operating profit before interest but after tax (NOPAT) Cost of Capital Employed EVA = Earnings before interest and tax (EBIT) Opportunity cost of total capital (equity and debt)

The EVA concept is based on the following assumptions: Timing of the income inflows and their size in successive years can be estimated with fair projections. Discount factor of the project, based on the project risk, can also be assigned a precise figure, say, 15% or 18%. Determinants of EVA EVA can increase under the following circumstances: 1. NOPAT grows due to higher efficiency without employing additional capital; and 2. Additional capital deployed in the firm generates higher return than the cost of capital; or 3. More costly capital is repaid or substantiated by repaying or substituting with cheaper capital