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Tuesday, April 9, 2013

Write a note on Market Value Added (MVA).

Market Value Added (MVA)
Market value Added (MVA) is the difference between the current market value of a firm and the capital contributed by investors. If MVA is positive, the firm has added value. If it is negative the firm has destroyed value. To find out whether management has created or destroyed value since its inception, the firm’s MVA can be used: MVA=Market value of capital – capital employed This calculation shows the difference between the market value of a company and the capital contributed by investors (both bondholders and shareholders). In other words, it is the sum of all capital claims held against the company plus the market value of debt and equity. The higher the MVA, the better . A high MVA indicates that the company has created substantial wealth for the shareholders. A negative MVA means that the value of the actions and investments of management is less than the value of the capital contributed to the company by the capital markets, meaning wealth or value has been destroyed. The aim of the company should be to maximize MVA. The aim should not be to maximize the value of the firm, since this can be easily accomplished by investing ever-increasing amounts of capital.

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