Market value added
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Market Value Added - MVA
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:
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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).
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Discover the simplicity of this important valuation metric. We reveal its underlying ideas and examine each of its components. Understanding Economic Value Added
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Market value added
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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.
References
- G. Bennett Stewart III, The Quest for Value (HarperCollins, 1991).
See also
- Economic value added
- Enterprise value
- Financial modeling
- Net present value
- Residual Income Valuation
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