Market Value Added Analysis
Market Value Added and Economic Value Added
Salahuddin K. Shameem
Market Value Added (MVA) is the difference between the current market value of a company and the original amount of capital contributed by investors.
MVA = market value of stock - shareholder-supplied equity = (shares outstanding)(stock P) - Total common equity
Economic Value Added (EVA) measures managerial effectiveness (economic profit).
EVA = NOPAT - after-tax dollar cost of K for operations = EBIT(1-T) - amount of operating K * WACC where T = corporate tax rate
WACC = weighted average cost of capital
K = capital or EVA = operating K (ROIC - WACC) where ROIC = return on invested capital if ROIC>WACC, new investments add value
EVA is an estimate of economic profit/the residual income that remains after the cost of all capital including equity capital, including the opportunity cost of equity capital (which is not an “accounting” cost). Note that net income does not reflect the amount of equity capital employed, but EVA does.
Relationship between EVA and MVA
1) they tend to go in the same direction (pos. correlation). However, MVA depends on stock prices/future expectations of investors.
2) EVA is used for managerial assessment more than MVA. EVA reflects performance over a year, while MVA reflects performance over the companies whole life. EVA can be applied to individual decisions or other units of a large corporation, while MVA must be applied to the whole company.
Economic value added (EVA) is a performance measure developed by Stern Stewart & Co that attempts to measure the true economic profit produced by a company. It is frequently also referred to as "economic profit", and provides a measurement of a company's economic success (or failure) over a period of time. Such a metric is useful for investors who wish to determine how well a company has produced value for its investors, and it can be compared against the company's peers for a quick analysis of how well the company
Salahuddin K. Shameem
Market Value Added (MVA) is the difference between the current market value of a company and the original amount of capital contributed by investors.
MVA = market value of stock - shareholder-supplied equity = (shares outstanding)(stock P) - Total common equity
Economic Value Added (EVA) measures managerial effectiveness (economic profit).
EVA = NOPAT - after-tax dollar cost of K for operations = EBIT(1-T) - amount of operating K * WACC where T = corporate tax rate
WACC = weighted average cost of capital
K = capital or EVA = operating K (ROIC - WACC) where ROIC = return on invested capital if ROIC>WACC, new investments add value
EVA is an estimate of economic profit/the residual income that remains after the cost of all capital including equity capital, including the opportunity cost of equity capital (which is not an “accounting” cost). Note that net income does not reflect the amount of equity capital employed, but EVA does.
Relationship between EVA and MVA
1) they tend to go in the same direction (pos. correlation). However, MVA depends on stock prices/future expectations of investors.
2) EVA is used for managerial assessment more than MVA. EVA reflects performance over a year, while MVA reflects performance over the companies whole life. EVA can be applied to individual decisions or other units of a large corporation, while MVA must be applied to the whole company.
Economic value added (EVA) is a performance measure developed by Stern Stewart & Co that attempts to measure the true economic profit produced by a company. It is frequently also referred to as "economic profit", and provides a measurement of a company's economic success (or failure) over a period of time. Such a metric is useful for investors who wish to determine how well a company has produced value for its investors, and it can be compared against the company's peers for a quick analysis of how well the company