MVA Approach

RAVICHANDRAN
 Introduction
• Value Creation Measure-Market Value
Added (MVA) Market Value Added is
defined as the difference between the
market value of the firm (including equity
and debt) and the total capital invested in
the firm
• It is a measure of external performance,
which is considered to be the best indicator
of shareholder value creation
 Introduction
• MVA has introduced a new measure of
shareholder value by Stewart (1991) which
reports the value market adds over the
book value of invested capital.

• Market Value Added = Company's total

Market Value - Capital Invested
 MVA
• Market value added is difference between the
Company's market value and book value of
shares.
• According to Stern Stewart, if the total market
value of a company is more than the amount
of capital invested in it, the company has
managed to create shareholder value.
• If the market value is less than capital
invested, the company has destroyed
shareholder value
 Market Value Added (MVA)
• Market Value Added (MVA) is a measure of
value, created by Stern Stewart & Co.,
remaining in close connection with Economic
Value Added.
• In contrast to EVA, which describes a
company’s internal situation,
• MVA is determined by its external condition,
i.e. how the market assesses the company on
the basis of the difference between the
market value of its stock and the amount of
capital that was supplied by investors, which
contains equity and debt.
 MVA
• Thus, “MVA is a kind of a bonus added on the
market to the capital invested”
• Like the EVA, MVA is calculated using the
value of equity and debt.
• Analysis and evaluation of the process of
creating shareholder value require introducing
the definition of market value added for
shareholders (MVAE), which presents the
difference between the market value of the
firm’s stock and the amount of equity capital
that was supplied by shareholders
• MVAE = MVE - IE
• where MVAE = market value-added for
shareholders,
• MVE = the market value of equity,
• IE = the value of equity capital supplied by
shareholders.
• Market Value Added = Market Value of equity -
Book value of equity
• MVAE illustrates the difference between the
amount of cash which investors would receive if
they sold their shares, and the capital which they
have invested in the company
• The application of MVAE in the research
will provide for an assessment of which
companies are increasing shareholders’
value, and which ones are reducing it.
• It will be also a starting point to study the
effects of shareholder value creation
 EVA
• EVA represents the economic surplus
generated in a single period, while MVA,
measuring the value created on the market
in relation to the invested capital base,
represents the expected value of all
future economic surpluses which the
company will generate over the period
of its life.
 EVA and MVA
• This relationship can be shown as follows:
 MVA
• Due to the fact that the market value added is
the sum of discounted future EVA, to achieve
the market value of invested capital above its
adjusted book value the company needs to
generate positive EVA over its economic life,
• However, if the market value of a business is
less than the capital base through which it
operates, the MVA is negative and we can
call it the loss of market value (MVL – Market
Value Loss.)
 What is Book Value of Equity ?
• Book value of equity refers to all equity
equivalent items like reserves, retained
earnings and provisions.
• In other words, in this context, all the items
that are not debt (interest bearing or
noninterest bearing) are classified as
equity.
• Market value added (MVA) is identical in
meaning with the market-to-book ratio.
• If MVA is positive, that means that market-to-
book ratio is less than one
• According to Stewart, Market value added
tells us how much value the company has
added to, or subtracted from, its
shareholders investment.
• Successful companies add their MVA and
thus increase the value of invested capital in
the company.
• MVAE is an external measure of a
company’s ability to create additional
value, providing a clear way to measure it.
• It depends on the verification of the
company made on the capital market,
based on the evaluation of development
opportunities and achieving positive EVAE
in the future.
• Unsuccessful companies decrease the
value of the capital originally invested in
the company.
• Whether a company succeeds in creating
MVA or not, depends on its rate of return.
• If a company's rate of return exceeds its
cost of capital, the company will sell on the
stock market with premium compared to
the original capital.
• On the other hand, companies that have
rate of return smaller than their cost of
capital sell with discount compared to the
original capital invested in company.
• Whether a company has positive or
negative MVA depends on the rate of
return compared to the cost of capital