Define the terms Market Value Added (MVA) and Economic Value Added (EVA), explain how each is...

Define the terms Market Value Added (MVA) and Economic Value Added (EVA), explain how each is calculated, and differentiate between them

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Expert Solution

MVA can be defined as the amount of wealth that a company is able to create for its stakeholders. EVA, on the other hand, can be defined as that financial measurement of return earned by a company that is in excess of the amount that the company needs to earn to appease shareholders.

MVA is computed by subtracting book value of shareholder’s equity from the market value of shares. Thus MVA = market value of shares – book value of shareholder’s equity. EVA is computed by using the following formula: EVA = NOPAT (net operating profit after tax) – c*Capital. In this equation c* is the cost of capital.

The difference between MVA and EVA is that EVA makes use of cost of capital and hence is a performance indicator. MVA, on the other hand, is just the difference between the current value of the company on the market and the initial contributions made by its investors and hence is not a performance metric or a performance indicator.

jeff jeffy answered 3 months ago

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