Market Value Added – Complete Details
Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed by investors (both bondholders and shareholders). In other words, it is the sum of all capital claims held against the company plus the market value of debt and equity. If MVA is positive, the firm has added value. If it is negative the firm has destroyed value.
The formula for MVA is:
MVA = V – K
- MVA is market value added
- V is the market value of the firm, including the value of the firm’s equity and debt
- K is the amount invested in the firm
MVA is the present value of a series of EVA values. MVA is economically equivalent to the traditional net present value measure of worth for evaluating an after-tax cash flow profile of a project if the cost of capital is used for discounting.
The higher the MVA, the better it is. A high MVA indicates the company has created substantial wealth for the shareholders. A negative MVA means that the value of the actions and investments of management is less than the value of the capital contributed to the company by the capital markets, meaning wealth or value has been destroyed.
The aim of the company should be to maximize MVA. The aim should not be to maximize the value of the firm, since this can be easily accomplished by investing ever-increasing amounts of capital.