/MVA he financial statements reflect historical data, but managers performance m
ID: 2814200 • Letter: #
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/MVA he financial statements reflect historical data, but managers performance must be evaluated on the basis of marketvalues. To provide ths formation, financial analysts have developed two measures: Market Value Added (MVA) and Economic Value Added (EVA) Market Value Added represents the difference between the money stockholders have invested in the firm versus the cash they could receive if the firm were sold. The equation for MVA is: MVA = (Shares outstanding x stock price)-Total common equity shareholder wealth is maximized when this difference is maximized shareholders The highera fim's MVA, the better the job management is doing for ts EconomicValue Added is sometimes called-e nomic p ofit . and it is closely related to M A. The equation for Evas EVA = EBIT(1-T) . (Total invested capital x After-tax percentage cost of capital) Note that total invested capital is equal to the sum of notes payable, long-term debt, and total common equity. EVA differs from net income because EVA has a deduction for the cost of equity, Positive EVA on an annual basis helps ensure that MVA is also positive. MVA can be determined for divisions as well as for the firm as a whole, so it is useful for establishing reasonable compensation for divisional managers as well as top company officersExplanation / Answer
The Answer mentioned in the drop down box is correct
1. The financial statements reflect historical data, but managers' performance must be evaluated on the basis of Market values
2. Shareholder wealth is maximized when this difference is maximized
3. the higher the firms MVA, the better the job management is doing for its shareholders.
4. economic value added s sometimes called "economic profit and it is closely related to MVA
5. EVA differs from net income because EVA has a deduction for the cost of equity
6. MVA can be determined for divisions as well as for the firm as a whole
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