Question

1) Describe the difference between what is measured by EVA and MVA

2) Overall purpose of adjusments to the financial statements for MVA/EVA analysis?

3) What information does EVA provide that is not provided in ROE?

Answer 1

(1): EVA measures economic value added while MVA measures market value added. EVA measures the true economic profit that is produced by a company. Economic profit = Net after tax operating profit – (Invested capital*Cost of capital %).

On the other hand MVA is the difference between the current total market value of a company and the capital that is contributed by investors. MVA is a wealth metric and measures the level or quantum of value that a company has accumulated over a period of time. MVA measures the stock market’s estimate of the net present value of a company’s past and expected capital investment projects.

(2): The overall purpose of adjustments to the financial statements for MVA/EVA analysis is to more accurately determine the economic value of a company. The premium value that is over and above the adjusted book value represents the market value added.

(3): EVA provided information with regards to spread between a company’s return on invested capital (ROIC) and the cost of capital multiplied by the total amount of capital invested. Thus EVA provided information with regards to additional value added if more money is invested in the business. ROE, on the other hand, do not provide such information with regards to return or value if additional investments are made.