What are the different ways and formulas for calculating EVA and MVA, and what are they useful for?
Economic Value Added (EVA) is an idea that has been around for a long time but was popularised by the firm Stern Stewart. It is an annual measure of the companys creation of value, established by comparing the cost of capital invested and the return on capital invested EVA = Capital employed x (Return on capital employed Cost of capital). See chapter 19 of the Vernimmen for definitions of these terms. EVA will always be high if: 1. Return on capital employed is high 2. The cost of financing the companys capital (equity and debt) is low 3. Growth of capital employed is high Market Value Added (MVA) measures the creation of stock market value. It is calculated as the difference between market capitalisation + value of debt capital employed (fixed assets plus working capital). In efficient markets, MVA is equal to the sum of expected EVA over the coming years, discounted by the weighted average cost of capital. To summarise, these measures have several advantages: – MVA measures the creat
