Market Value Added
Market value added represents the wealth generated by a company for its shareholders since inception. It equals the amount by which the market value of the company's stock exceeds the total capital invested in a company (including capital retained in the form of undistributed earnings).
Since the main goal of a for-profit organization is to maximize shareholders' wealth, market value added is an important measure to analyze how much value a company has added to the wealth of its shareholders. Higher market value added is better.
Formula
Market value added in calculated in two flavors. The most common calculation is from the perspective of common shareholders and it equals the excess of market capitalization over the total common shareholders' equity as shown below:
Market Value Added (MVA)
= Market Capitalization − Total Common Shareholders' Equity
= Total Shares Outstanding × Current Market Price − Total Common Equity
From the perspective of all investors (i.e. both shareholders and debt holders, and not just shareholders), market value added equals the market value of the company minus sum of the book value of equity and debt.
Market Value Added for all Investors
= Market Value of the Company − (Book Value of Equity + Book Value of Debt)
Market Calue Added for all Investors
= Market Value of Equity − Total Shareholders' Equity + Market Value of Debt − Book Value of Debt
Example
Calculate the market value added using the following information:
| Total number of shares issued | 20,000,000 |
| Number of shares held as treasury stock | 1,100,000 |
| Current share price | 35.5 |
| Total invested capital plus retained earnings | $453,503,000 |
| Cost of treasury stock | $39,050,000 |
Assume that the market value of debt equals its book value.
Solution
Number of Shares Outstanding = 20,000,000 − 1,100,000 = 18,900,000
Market Capitalization = 18,900,000 × $35.5 = $670,950,000
Total Shareholders' Equity
= Total Invested Capital + Retained Earnings − Cost of Treasury Stock
= $453,503,000 − $39,050,000 = $414,453,000
Market Value Added for Shareholders = $670,950,000 − $414,453,000 = $256,497,000
Market Value Added for all Investors
= Market Value of Equity − Total Shareholders' Equity + Market Value of Debt − Book Value of Debt
= $256,497,000 + 0 = $256,497,000
by Obaidullah Jan, ACA, CFA and last modified on