The market value added (MVA) is a performance measurement tool that computes for the increase in the value of the company's stock price. The MVA is derived by comparing the total market value of the firm and the book value of the invested capital.
Market-value added can be calculated by comparing the market value of the entity's stocks versus its book value.
A high market-value added is generally favorable. It means that the market perceives the company as more valuable than its initial recorded value.
MVA is typically computed for stockholders but may also be computed for all investors (i.e. including bondholders). In any case, the basic formula is to compare market value and book value.
The formula in computing for the market value added is:
|MVA||=||MV of stocks - Book value of stockholders' equity|
The market value (MV) of stocks is computed by multiplying the number of outstanding shares by the market price per share.
If the company has both common and preferred shares, the two are added to get the combined market value.
The stockholders' equity of ABC Company shows a total of $852,000 (share capital, additional paid-in capital, and retained earnings). It has 100,000 common shares and 5,000 preference shares outstanding.
The common shares currently have a market value of $12.50 per share. Preferred shares are currently selling at $100 per share. Compute for the market value added.
MV of common shares = 100,000 x $12.50 = $1,250,000
MV of preferred shares = 5,000 x $100 = $500,000
Total market value of stocks = $1,250,000 + $500,000
Total market value of stocks = $1,750,000
|MVA||=||MV of stocks - BV of stockholders' equity|
|=||$1,750,000 - $852,000|
The higher the MVA, the better. Investors apparently want their invested capital to grow. In fact, one of the main goals of a firm is maximization of shareholders' wealth by increasing the stock price.