Market Value Added

MVA is a calculation that shows the difference between the market value of a company and the
capital contributed by investors (both bondholders and shareholders). In other words, it is the
sum of all capital claims held against the company plus the market value of debt and equity.
Calculated as:

BREAKING DOWN 'Market Value Added - MVA'

The higher the MVA, the better. A high MVA indicates the company has created substantial
wealth for the shareholders. A negative MVA means that the value of management's actions and
investments are less than the value of the capital contributed to the company by the capital
market (or that wealth and value have been destroyed).
1. Small Business
2. Finances & Taxes
3. Market Value
Market Value Added Vs. Economic Value Added

Small business owners need to measure the value of their companies to determine their current
status. These valuations can be helpful for determining credit worthiness, tax purposes or
suitability for acquisition by a larger firm. Two primary methods available to measure the value
of a business are its market value added and its economic value added. While these methods use
different techniques and return different results, they are also highly useful in calculating a
company's value.

MVA Method
Market value added can be calculated as the difference between the company's market value and
the amount of capital invested in the business. MVA measures the operational capabilities of a
company's management and represents the value of the company as a whole on the open market.
The MVA formula does not account for any cash payments that the company may have paid out
to shareholders. It also does not measure the opportunity costs relative to any alternative
investments.
MVA Example
The MVA calculation works best for companies that have objective valuations, such as those
with stocks traded on public exchanges. However, the MVA method can also be useful for small,
private companies that have document the capital contributions of its owners. For instance, if the
partners in a small restaurant have contributed $250,000 into the business since its opening, and
the restaurant is currently valued at $600,000, the restaurant's MVA is $350,000.
EVA Properties
Economic value added can be calculated as the difference between the company's net operating
profit after tax and a portion of the amount of capital invested in the business. The amount of
capital invested is multiplied by the weighted average cost of capital, which measures the
opportunity cost of alternative investments. EVA, also known as "economic profit", indicates
how profitable a company's projects have been, which also serves as a measure of company
management's efficiency.
EVA Example
Rather than measure the company's health based on its current value, EVA measures its
robustness based on its net profits. To use the example above, the total capital invested in the
restaurant is $250,000. If the restaurant's net operating profit after tax is $20,000, and its
weighted average cost of capital is 6 percent, the second term in the calculation is $250,000 x
0.06, or $15,000. The EVA calculation returns a value of $20,000 - $15,000, or $5,000.

Market value added

Market Value Added (MVA) is the difference between the current market value of a firm and
the capital contributed by investors. If MVA is positive, the firm has added value. If it is
negative, the firm has destroyed value. The amount of value added needs to be greater than the
firm's investors could have achieved investing in the market portfolio, adjusted for the leverage
(beta coefficient) of the firm relative to the market.
The formula for MVA is:

where:

MVA is market value added

V is the market value of the firm, including the value of the firm's equity and debt

K is the capital invested in the firm

MVA is the present value of a series of EVA values. MVA is economically equivalent to the
traditional NPV measure of worth for evaluating an after-tax cash flow profile of a project if the
cost of capital is used for discounting.

Economic Value Added

In corporate finance, Economic Value Added or EVA, is an estimate of a firm's economic profit
being the value created in excess of the required return of the company's investors (being
shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of
financing the firm's capital. The idea is that value is created when the return on the firm's
economic capital employed is greater than the cost of that capital. This amount can be
determined by making adjustments to GAAP accounting. There are potentially over 160
adjustments that could be made but in practice only five or seven key ones are made, depending
on the company and the industry it competes in.

Contents

1 Calculating EVA

2 Comparison with other

approaches

3 Relationship to market value

added

4 Integrating EVA and PBC

5 See also

6 References

7 External links

Calculating EVA
EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the
product of the cost of capital and the economic capital. The basic formula is:

where:

, is the Return on Invested Capital (ROIC);

is the weighted average cost of capital (WACC);

is the economic capital employed;
NOPAT is the net operating profit after tax, with adjustments and translations,
generally for the amortization of goodwill, the capitalization of brand
advertising and others non-cash items.

EVA Calculation:
EVA = net operating profit after taxes a capital charge [the residual income method]
therefore EVA = NOPAT (c capital), or alternatively

EVA = (r x capital) (c capital) so that

EVA = (r-c) capital [the spread method, or excess return method]
where:

(WACC).

r = rate of return, and

c = cost of capital, or the Weighted Average Cost of Capital

NOPAT is profits derived from a companys operations after cash taxes but before financing
costs and non-cash bookkeeping entries. It is the total pool of profits available to provide a cash
return to those who provide capital to the firm.
Capital is the amount of cash invested in the business, net of depreciation. It can be calculated as
the sum of interest-bearing debt and equity or as the sum of net assets less non-interest-bearing
current liabilities (NIBCLs).
The capital charge is the cash flow required to compensate investors for the riskiness of the
business given the amount of economic capital invested.
The cost of capital is the minimum rate of return on capital required to compensate investors
(debt and equity) for bearing risk, their opportunity cost.
Another perspective on EVA can be gained by looking at a firms return on net assets (RONA).
RONA is a ratio that is calculated by dividing a firms NOPAT by the amount of capital it
employs (RONA = NOPAT/Capital) after making the necessary adjustments of the data reported
by a conventional financial accounting system.
EVA = (RONA required minimum return) net investments
If RONA is above the threshold rate, EVA is positive.

Comparison with other approaches

Other approaches along similar lines include Residual Income Valuation (RI) and residual cash
flow. Although EVA is similar to residual income, under some definitions there may be minor
technical differences between EVA and RI (for example, adjustments that might be made to
NOPAT before it is suitable for the formula below). Residual cash flow is another, much older
term for economic profit. In all three cases, money cost of capital refers to the amount of money
rather than the proportional cost (% cost of capital); at the same time, the adjustments to NOPAT
are unique to EVA.
Although in concept, these approaches are in a sense nothing more than the traditional,
commonsense idea of "profit", the utility of having a separate and more precisely defined term

such as EVA is that it makes a clear separation from dubious accounting adjustments that have
enabled businesses such as Enron to report profits while actually approaching insolvency.
Other measures of shareholder value include:

Added value

Market value added

Total shareholder return.

[1]

Relationship to market value added

The firm's market value added, or MVA, is the discounted sum (present value) of all future
expected economic value added:

Note that MVA = PV of EVA.

More enlightening is that since MVA = NPV of Free cash flow (FCF) it follows therefore that the
NPV of FCF = PV of EVA;
since after all, EVA is simply the re-arrangement of the FCF formula.

Integrating EVA and PBC

Recently, Mocciaro Li Destri, Picone & Min (2012)[2] proposed a performance and cost
measurement system that integrates the EVA criteria with Process Based Costing (PBC). The
EVA-PBC methodology allows us to implement the EVA management logic not only at the firm
level, but also at lower levels of the organization. EVA-PBC methodology plays an interesting
role in bringing strategy back into financial performance measures.

What is the difference between economic

value added and market value added?
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 is operating in its industry.
Economic profit can be calculated by taking a company's net after-tax operating profit and
subtracting from it the product of the company's invested capital multiplied by its percentage
cost of capital. For example, if a fictional firm, Cory's Tequila Company (CTC), has 2005 net
after-tax operating profits of $200,000 and invested capital of $2 million at an average cost of
8.5%, then CTC's economic profit would be computed as $200,000 - ($2 million x 8.5%) =
$30,000. This $30,000 represents an amount equal to 1.5% of CTC's invested capital, providing a
standardized measure for the wealth the company generated over and above its cost of capital
during the year.
Market value added (MVA), on the other hand, is simply the difference between the current total
market value of a company and the capital contributed by investors (including both shareholders
and bondholders). MVA is not a performance metric like EVA, but instead is a wealth metric,
measuring the level of value a company has accumulated over time. As a company performs well
over time, it will retain earnings. This will improve the book value of the company's shares, and
investors will likely bid up the prices of those shares in expectation of future earnings, causing
the company's market value to rise. As this occurs, the difference between the company's market
value and the capital contributed by investors (its MVA) represents the excess price tag the
market assigns to the company as a result of it past operating successes.