We discussed the concept of economic value added or the value above the return expected by investors in a previous article. This article address another measure of shareholder value, which is market value added (MVA).
Market Value Added is determined by assessing the difference between market value of the company to that of the amount of capital contributed by shareholders. A negative amount would be considered value as lost while a positive amount is considered as value created.
Many professionals consider MVA as the equivalent of a discount cash flow model to determine market value in which cash flows are discounted at the firm’s cost of capital.
As with other market valuation techniques a great deal depends on outside factors, which at times may not contribute to an increase/decrease in value. Therefore, a professional appraiser should be commissioned to review many techniques to avoid such concerns.
Always make sure that you make an informed decision in all cases,
All the Best,