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EVA and MVA

MVA
Primary goal of financial managers is to
maximize the wealth of shareholders
MVA measures whether the above objective
is achieved or not
MVA is the difference between the market
value of the firms stock and the amount of
equity capital the shareholders supplied

MVA

This difference is called the Market Value


Added (MVA):

Lets stay, total number of shares outstanding of


Luck cement are 300,000, its share price in
market is Rs. 400, while its balance sheet showed
that stockholders had put up only Rs.50 million.
What was the MVA of Luck cement?

Economic Value Added


Economic Value Added (EVA)1 is an accounting-based
measure of operating performance.
It measures the managerial effectiveness in a given year

EVA = method of determining the extent to which a


company earns profits in excess of its cost of capital

EVA = NOPAT (WACC x NET ASSETS)


Where
NOPAT = Net operating profit after tax

= EBIT (1 T),
Net assets= Adjusted book value of net capital at the
beginning of the period

EVA has certain


characteristics
It provides greater accountability for
investor capital as it measures the required
return on all investments.
It is easy to communicate.
It aligns managerial and shareholders
interests by tying management
compensation to mprovements in EVA.

Steps in EVA - Calculating Net


Operating Profit After Tax (NOPAT)
NOPAT is calculated by deducting cash
taxes from EBIT and adding the value of
non-cash items like goodwill amortization
and LIFO charges.
Depreciation is deducted to arrive at EBIT
because depreciation is a real economic
cost. To arrive at NOPAT:

Calculating NOPAT
.

Calculating Invested
Capital
.

In the past, shareholders have been thought


of as a free source of funds and
management paid no attention to their well
being
The biggest and most notable effect is that
it has gotten managers and employees to
think like shareholders as well as act like
shareholders.

How to Increase EVA

Increasing Eva always falls into one of the three


following categories:
1. Rate of return increases with the existing capital
base, meaning that more operating profits are
generated without tying any more capital in the
business.
2. Additional capital is invested in businesses
earning more than the cost of capital. (Making NPV
positive investments)
3. Capital is withdrawn or liquidated from
businesses that fail to earn a return greater than
the cost of capital.

Market Value Added (MVA)


The primary goal of most firms is to
maximize shareholders wealth
This goal also benefits the economy
Shareholder wealth is maximized by
maximizing the difference between the
market value of the firms stock and the
amount of equity capital that was supplied
by shareholders

This difference is called the Market Value


Added (MVA):

To illustrate, consider Coca-Cola. In late 2001, its


total market equity value was $123.5 billion,
while its balance sheet showed that stockholders
had put up only $10.4 billion. Thus, Coca-Colas
MVA was $123.5 - $10.4 = $113.1 billion.

Market Value Added Value

Total
market
value

Premium

Market
value added

Book
value
debt +
equity

Investment

Also, Market Value Added


MVA = Present value of all future EVA

Total
market
value

Expected
improvement
in EVA

MVA

Book
value
debt +
equity

Slide 16

Current level
of EVA

Relationship for EVA & MVA


EVA
Year 1

Market
Value
Market
value

EVA
Year 2

EVA
EVA
Year 3 .... Year n

MVA

Book
value
capital

EVA + EVA + EVA + ... + EVA


1+r
(1 + r)2 (1 + r)3
(1 + r)n
Market value is based on establishing the
economic investment made in the company
(capital), making a best guess about what
economic profits (EVA) will happen in the future,
and discounting those EVAs to the present to get
market value added.

EVA Drives MVA


Companies that consistently earn profits in
excess of their required return ...
NOPAT

EVA
Charge

are typically valued at premiums to book value.


MVA

Market
Value
Capital

Im p ro v e m e n t in E V A
S a le s

O p e r a t in g E x p e n s e s

C a p it a l C h a r g e

C u s t o m e r S a t is f a c t i o n

N e w P r o d u c ts

O ve rh e ad

C o m p e n s a tio n

A c q u i s it io n s & D iv e s t it u r e s

W o r k in g C a p i t a l M a n a g e m e n t

V o lu m e

M a r k e t in g

Account M anagem ent

T r a in i n g & D e v e l o p m e n t

A ll i a n c e s

A c c o u n t s R e c e iv a b le

P r o d u c t P r ic in g

G r o w th

M a n u f a c t u r in g C o s t s

R & D D e c is i o n s

I n v e n to ry M a n a g e m e n t

Manufacturing
Research
ManufacturingEVA
EVADrivers
Drivers
Research&
&Development
DevelopmentEVA
EVADrivers
Drivers
Reduce
Reduceinventory
inventory
Reduce
Reducecycle
cycletime
time
Improve
yields
Improve yields
Reduce
Reducescrap/waste
scrap/waste
Maximize
Maximizelabor
laborefficiencies
efficiencies
Improve
vendor
efficiencies
Improve vendor efficiencies
Process
Processimprovements
improvements

Staff
StaffEVA
EVADrivers
Drivers
Work
Workgroup/process
group/processsimplification
simplification
Consistency
monitors
Consistency monitorsaudit
audit
Centralizing
Centralizingresources/synergies
resources/synergies
Best
Bestpractices
practicesbenchmarking
benchmarking
Insourcing/outsourcing
Insourcing/outsourcingdecisions
decisions
Simplify
SimplifyEVA
EVAmeasurements/reporting
measurements/reporting
Ensure
Ensurecompliance
compliancewith
withlegislation
legislation

Improve
Improveto-market
to-marketprocess
process
Reduce
ReduceR&D
R&Dexpenses
expensesas
as%%ofofnew
newproduct
productsales
sales
Strategic
partners
for
R&D
Strategic partners for R&D
Stronger
Strongerlinks
linkstotoproduct
productmarketing
marketing
New
Newproducts
productsvia:
via:
- -Research
Research
- -Formulation
Formulation
- -Development
Development
- - Acquisition
Acquisition
Marketing
MarketingEVA
EVADrivers
Drivers
Increase
Increasemarket
marketshare
share/ /revenue
revenue
New
markets
New markets
More
focused
More focusedchannel
channelprograms
programs
Voice
Voiceofofcustomer
customer/ /consumer
consumer
Leverage
Leverageadvertising
advertising/ /promotion
promotion
Build
Buildbrand
brandawareness
awareness

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