A term closely related to EVA is ‘market value added (MVA)’. It is the market value of the capital employed in the firm less the book value of capital employed. MVA is calculated by summing up the paid-up value of equity and preference share capital, retained earnings, long-term and short- term debt and subtracting this sum from the market value of equity and debt.
MVA is a cumulative measure of corporate performance. It measures how much a company’s stock has added to or taken out of investors’ pocket books over its life and compares it with the capital those same investors put into the firm. EVA drives the MVA. Continuous improvements in EVA year after year will lead to increase in MVA. MVA is a modified version of EVA as the value is more related to market. To understand the mechanics of MVA, it is essential to understand the related concept of MVA.
MVA is the difference between the total value of the company and the total capital (including equity and debt) contributed in the company:
MVA = Total value – Total capital or
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MVA = Current market value of debt and equity – Economic book value
(Where, Economic Book Value = Share capital + Free Reserves + Debt)
The aim of a company’s managers is to maximize value in order to do value creation. The aim is not to maximize the value of a company, which can be easily accomplished by contributing additional inputs of capital. MVA increases when the invested capital earns a rate of return greater than the cost of capital.
When newly raised capital is invested in value creating projects, i.e. those with positive net present value, MVA increases. MVA is a fairly reliable measure of the management’s efforts at adding value. It is a determinant of the premium the market is willing to place on the company’s value in recognition of its future earnings potential. The aim of the management is to maximize the amount by which the company’s market value exceeds the capital supplied by the investors.
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Problem:
Bharat Ltd. has Rs.100 crore worth of common equity on its balance sheet, and 50 lakhs shares of stock outstanding. The company’s market value added (MVA) is Rs.24 crores. What is the company’s stock price?
Solution:
Rs. 124 crore = 50 lakh P0
P0 = Rs. 124 crore/50 lakh
P0 = Rs. 248