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
T = corporate tax rate
WACC = weighted average cost of capital
K = capital
EVA = operating K (ROIC - WACC)
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 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
15.4 - Fundamental Differences Between Futures and Forwards
The fundamental difference between futures and forwards is that futures are traded on exchanges and forwards trade OTC. The difference in trading venues gives rise to notable differences in the two instruments: * Futures are standardized instruments transacted through brokerage firms that hold a "seat" on the exchange that trades that particular contract. The terms of...
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