Question

Describe the market Value added and the purpose it serves in a corporation

Answer 1

Market value added is the difference between the Market value of the company and the capital that the investors(shareholders and debt holders ) have contributed towards it.

The purpose it serves in a corporation is that it indicates the capacity of the organisation to generate value in the future. It measures weather the firm has created value or destroyed value.

As, MVA = (Market Value of Equity + Market Value of Debt)-(Book Value of Equity + Book Value of Debt )

• MVA increases only when the firm  invested capital earns a rate of return greater than the cost of capital.
• When a firm invests on positive NPV projects , then the MVA increases.
• When the firm invests in projects that generate negative NPV, then the MVA falls.