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 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

Written by Obaidullah Jan