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    Measuring Shareholders Value Creation

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    Sudipta Das
    1. The document discusses two measures for measuring shareholders value creation: Economic Value Added (EVA) and Market Value Added (MVA). 2. EVA is a measure of performance that calculates the after-tax operating profits generated by an investment minus the cost of funds used to finance the investment. If EVA is positive, the investment adds value and enhances shareholder wealth. 3. MVA is defined as the difference between a firm's current market value and the book value of capital employed. A positive MVA means the market value exceeds book value, while a negative MVA means book value exceeds market value.

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    Measuring Shareholders Value Creation

    Uploaded by

    Sudipta Das
    56 views2 pages
    1. The document discusses two measures for measuring shareholders value creation: Economic Value Added (EVA) and Market Value Added (MVA). 2. EVA is a measure of performance that calculates the after-tax operating profits generated by an investment minus the cost of funds used to finance the investment. If EVA is positive, the investment adds value and enhances shareholder wealth. 3. MVA is defined as the difference between a firm's current market value and the book value of capital employed. A positive MVA means the market value exceeds book value, while a negative MVA means book value exceeds market value.

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    Measuring Shareholders Value Creation

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    1. The document discusses two measures for measuring shareholders value creation: Economic Value Added (EVA) and Market Value Added (MVA). 2. EVA is a measure of performance that calculates the after-tax operating profits generated by an investment minus the cost of funds used to finance the investment. If EVA is positive, the investment adds value and enhances shareholder wealth. 3. MVA is defined as the difference between a firm's current market value and the book value of capital employed. A positive MVA means the market value exceeds book value, while a negative MVA means book value exceeds market value.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    56 views2 pages

    Measuring Shareholders Value Creation

    Uploaded by

    Sudipta Das
    1. The document discusses two measures for measuring shareholders value creation: Economic Value Added (EVA) and Market Value Added (MVA). 2. EVA is a measure of performance that calculates the after-tax operating profits generated by an investment minus the cost of funds used to finance the investment. If EVA is positive, the investment adds value and enhances shareholder wealth. 3. MVA is defined as the difference between a firm's current market value and the book value of capital employed. A positive MVA means the market value exceeds book value, while a negative MVA means book value exceeds market value.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Measuring Shareholders Value

    Creation
    Article shared by: 
    This article throws light upon the top two measures used
    for measuring shareholders value creation. The
    measures are: 1. Economic Value Added (Eva) 2. Market
    Value Added (MVA).
    Shareholders Value Creation: Measure # 1. Economic Value Added
    (Eva):

    Economic value added is a measure of performance evaluation


    that was originally employed by Stern Stewart & Co. It is very
    popular measure today which is used to measure the surplus
    value created by an investment or a portfolio of investments. EVA
    has been considered as a better measure of divisional
    performance as compared to the Return on Assets ROA or ROI.

    It is also being used to determine whether and investment


    positively contributes to the shareholders wealth. The economic
    value added of an investment is simply equal to the after tax
    operating profits generated by the investment minus the cost of
    funds used to finance the investment.

    EVA can be calculated as below:

    According to this approach, an investment can be accepted only if


    the surplus (EVA) is positive. It is only the positive EVA that will
    add value and enhance the shareholders wealth. However, to
    calculate the economic value added we need to estimate the net
    operating profit after tax and cost of funds invested.

    Suppose an investment generates net operating profit after tax of


    Rs. 20 lakhs and the cost of financing investment is Rs. 16 lakhs.
    The economic value added by the investment shall be? 4 lakh and
    it should be accepted.

    Shareholders Value Creation: Measure # 2. Market Value


    Added (MVA):

    The market valued added (MVA) is the sum total of all the
    present values of future EVAs.

    The market value added (MVA) can also be defined as the


    difference between the current market value of the firm and the
    book value of capital employed by the firm. The market value of
    the firm is simply the sum of market value of its equity and debt.
    In case, the market value of a firm exceeds the book value of
    capital employed, it is said to have a positive MVA.

    In the same manner, if the value of capital employed exceeds the


    market value of the firm, it is said to have a negative MVA.

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