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Accounting for Financial Management: EVA / MVA The financial statements reflect historical data, but managers' performance must be evaluated on the basis of market values.
Accounting for Financial Management: EVAMVA
The financial statements reflect historical data, but managers' performance must be evaluated on the basis of
market
values. To provide this information, financial analysts have developed two measures: Market Value Added MVA and Economic Value Added EVA
Market Value Added represents the difference between the money stockholders have invested in the firm versus the cash they could receive if the firm were sold. The equation for MVA is:
MVA Shares outstanding times Stock price Total common equity
Shareholder wealth is maximized when this difference is
maximized
The
higher
a firm's MVA, the better the job management is doing for its shareholders.
Economic Value Added is sometimes called
economic profit
and it is closely related to MVA. The equation for EVA is:
EVA NOPAT Total net operating capitalWACC
EVA differs from invested capital is equal to the sum of notes payable, longterm debt, and total common equity.
EVA differs from
net income
because EVA has a deduction for the cost of equity. Positive EVA on an annual basis helps ensure that MVA is also positive.
EVA
can be determined for divisions as well as for the firm as a whole, so it is useful for establishing reasonable compensation for divisional managers as well as top company officers.
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Quantitative Problem: Rosnan Industries' and balance sheets and income statements are shown below. All of the balance of Cash and Equivalents is an operating asset.
Balance Sheets:
Cash and equivalents $ $
Accounts receivable
Inventories
Total current assets $ $
Net plant and equipment
Total assets $ $
Accounts payable $ $
Accruals
Notes payable
Total current liabilities $ $
Longterm debt
Common stock
Retained earnings
Total liabilities and equity $ $
Income Statements:
Sales $ $
Operating costs excluding depreciation
EBITDA $ $
Depreciation and amortization
EBIT $ $
Interest
EBT $ $
Taxes
Net income $ $
Dividends paid $ $
Addition to retained earnings $ $
Shares outstanding
Price $ $
WACC
Using the financial statements above, what is Rosnan's market value added MVA Do not round intermediate calculations. Round your answer to the nearest dollar.
$
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Review the MVA definition and equation.
Be careful about the order of mathematical operations and parentheses.
Make sure that you include total common equity and not just retained earnings or common stock.
Using the financial statements given earlier, what is Rosnan's economic value added EVA Do not round intermediate calculations. Round your answer to the nearest cent.
$
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Incorrect
Check My Work Feedback
Review the EVA definition and equation.
Review the definition of total invested capital.
Be careful about the order of mathematical operations and parentheses.
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