10. Value added to a firm

Financial statements reflect only the book values of the data that analysts use to evaluate a companys performance. To incorporate market values, two additional performance measures were developedmarket value added (MVA) and economic value added (EVA).

The EVA metric effectively measures the amount of shareholder wealth that the firms management has the firms value during a time period. If EVA is then management has increased value.

Which performance measure evaluates the amount by which profits exceed or fall short of the cost of capital in any one period?

Economic value added

Market value added

Consider the following case:

Last year, Jackson Tires reported net sales of $40 million and total operating costs (including depreciation) of $26 million. It had $75 million of investor-supplied capital, with an after-tax cost of 12.5%. If the companys tax rate is 25%, how much value did its management create or lose for Jackson Tire during the year?

$0.141 million

$20.625 million

$1.125 million

$46.875 million

EVA calculates the value added to a firm in a given year. Does that mean that a firms MVA is the sum of all the EVAs generated by the firm during its life? (Note: Stern Stewart copyrighted the terms MVA and EVA. Other firms use different terms for these concepts, but MVA and EVA are most commonly used in practice.)