1 EVA MVA Intro 013116 - EVA PDF

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Value Added Measures – EVA and MVA A set of value-added measures of performance are directly related to the capital budgeting methods that are used in corporate finance. These indicators measure economic profit, which is analogous to the net present value (NPV) method used in capital budgeting. As performance measure, these indicators assess management performance by measuring the ability of managers to add value to the firm.

Economic Value Added (EVA) EVA (economic value added) and MVA (market value added) are two of the frequently-used value added measures. These indicators were developed and marketed by consultants Stern Stewart. EVA compares the firm’s net operating profit less adjusted taxes (NOPLAT) to the firm’s total cost of capital in dollar terms, including the cost of equity. If the firm’s NOPLAT exceeds its dollar cost of capital during a specific year, it has positive EVA for the year and has added value for shareholders. Conversely, if EVA is negative, the firm has not earned enough to cover its cost of capital and the value of the firm has declined. EVA = Adjusted Operating Profits BeforeTaxes Minus: Cash Operating Taxes Equals: Net Operating Profits Less Adjusted Taxes (NOPLAT) Minus: Dollar Cost of Capital Equals: Economic Value Added (EVA) EVA Return on Capital = EVA / Total Capital Market Value Added (MVA) While EVA is a measure of internal performance, MVA us a measure of external performance, how the market has evaluated the firm’s performance in terms of the market values of debt and equity compared to the capital invested in the firm. MVA = Market Value of the Firm – Capital Where Market Value of the Firm = (Market Value of Debt + Market Value of Equity) Excel Worksheet Attached Attached is an Excel Workbook that contains several worksheets. The first worksheet reviews the definitions of EVA and MVA. The second worksheet provides an example of how to calculate EVA. The third worksheet provides an example of how to calculate MVA. The last worksheet includes an Excel model that can be used to calculate EVA and MVA for a firm....