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Value based management (VBM) emphasizes shareholder value. There are three approaches to VBM described in one...

Value based management (VBM) emphasizes shareholder value. There are three approaches to VBM described in one of the article readings “Creating Shareholder Value”:

1)   Total shareholder return

2)   Market value added

3)   Economic value added

Explain how value is measured under two of these approaches to VBM. Note: if multiple responses are included, only the first two response will be marked.

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Answer #1

Answer.

2) Market Value Added- Market Value Added(MVA) and Economic Value Added(EVA) are one of the ways through which the investors can assess the company's value. In simple terms MVA is the difference between the current market value of the firm and the intial capital invested by both the stockholders and bondholders. It can be denoted by the following formula.

MVA= Market value of Stocks-Book Value of the stocks.

3) Economic Value Added- EVA focuses on true economic profitability of the company. EVA is the difference between Net Operating Profit after taxes earned by the company and the cost of capital.

A positive EVA implies that the company is generating values for its Shareholders and vice versa.It can be denoted by the following formula.

EVA= NOPAT- Weighted Average Cost of Capital*( Invested Capital)

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