MVA (Market Value Added) Calculator
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Historical Background
Market value added (MVA) is a financial metric introduced by Stern Stewart & Co. in the 1990s to evaluate the value created by a company beyond the amount of capital invested in it. It helps quantify the ability of a company to generate wealth for shareholders and other stakeholders.
Formula
The formula to calculate MVA is:
\[ \text{MVA} = \text{TMV} - \text{CI} \]
where:
- MVA: Market Value Added ($)
- TMV: Total Market Value ($)
- CI: Capital Invested ($)
Example Calculation
Assume that a business currently has a total market value of $500 million, while the total capital invested is $350 million. The MVA is calculated as:
\[ \text{MVA} = 500\,\text{M} - 350\,\text{M} = 150\,\text{M} \]
Importance and Usage Scenarios
MVA provides a measure of the value that a business has created (or lost) for its investors over time. This metric is important for:
- Investors: To assess the company's value creation ability.
- Management: To identify strengths and weaknesses in capital allocation.
- Comparative Analysis: To compare the performance of different companies.
Common FAQs
1. Why is MVA important?
MVA is crucial because it shows the difference between the firm's market value and the invested capital. Positive MVA indicates value creation, while negative MVA suggests value destruction.
2. How is TMV calculated?
TMV is the sum of the market value of a company's equity and its outstanding debt.
3. Can MVA be negative?
Yes, MVA can be negative if the capital invested is greater than the current market value, indicating value destruction.