What is Market Value Added?
Market Value Added is the difference between the capital contributed to the company by bondholders and shareholders and the final market value of the product.
How Does Market Value Added Work?
The formula used to find market value added is:
Market Value Added = Market Value - Capital Invested
Increasing MVA or increasing shareholder wealth is the primary goal of any business and the reason for its existence.
For example, if bondholders and shareholders have contributed $1,000,000 to form Company XYZ and during its existence since inception and it is currently listed on the stock exchange with a stock market value of $2,000,000, it can be said that the MVA of the company is $1,000,000.
MVA ($1,000,000) + Capital invested ($1,000,000) = Market Value ($2,000,000)
Why Does Market Value Added Matter?
This measures the performance of management. It also reflects the general market. Management has a part in it but not entirely. In a bull stock market, the amount contributed by management may even be negative, but the overall market may be driving the MVA into positive territory. This calculation does not take into consideration any cash payments that have been paid out to stockholders in the interim nor does it measure the opportunity costs in relation to alternative investments.