Finc Mgmt - Part 3 - reserve for Scofied

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EVA and MVA

ECONOMIC VALUE ADDED (EVA)
MARKET VALUE ADDED (MVA)
ECONOMIC VALUE ADDED
EVA is a measure that is used to estimate the amount of economic value added by
management during a given year.
MARKET VALUE ADDED
MVA is the difference between the market value of equity and the amount of
Equity Capital that investors have supplied.
EVA &MVA ARE CLOSELY RELATED
EVA and MVA are related in a significant way. Managing the firm in ways that increase EVA will
generally lead to higher MVA, an important measure of shareholder wealth creation.

EVA Example

ECONOMIC VALUE ADDED
EVA = Net Operating Profit After-tax - (WACC * Invested Capital)
Where Invested Capital = (Debt + Equity); It is determined by summing
short-term debt, long-term debt and shareholder equity (capital stock, paid-in capital
and retained earnings).
Net Operating Profit is determined by reducing operating income by the amount
of estimated income taxes.
The firm's weighted average cost of capital is used to calculate the annual capital charge.
It is determined by multiplying the after-tax weighted average cost of capital by
the amount of invested capital.
EVA Example
Year Short-term Debt Long-term Debt Common Stock Paid-in Capital Retained Earnings Total Capital Invested
1 $500.0 $26,100.0 $5,000.0 $16,000.0 $16,392.0 $63,992.0
2 $0.0 $22,800.0 $5,000.0 $16,000.0 $25,275.0 $69,075.0
3 $0.0 $69,500.0 $5,000.0 $16,000.0 $69,141.0 $159,641.0
4 $0.0 $61,200.0 $5,000.0 $16,000.0 $123,544.0 $205,744.0
5 $0.0 $102,900.0 $5,000.0 $16,000.0 $206,599.0 $330,499.0
6 $0.0 $89,600.0 $5,000.0 $16,000.0 $276,644.0 $387,244.0
7 $0.0 $76,300.0 $5,000.0 $16,000.0 $378,709.0 $476,009.0
8 $0.0 $63,000.0 $4,500.0 $0.0 $286,020.0 $353,520.0
9 $0.0 $51,500.0 $4,300.0 $0.0 $278,952.0 $334,752.0
Year Sales Operating Income (EBIT) Less: Taxes Equals: Net Operating Profit After Taxes (NOPAT) Invested Capital WACC Capital Charge EVA (NOPAT - Capital Charge)
1 $82,800.0 $13,400.0 $3,200.0 $10,200.0 $63,992.0 12.60% $8,063.0 $2,137.0
2 $97,200.0 $18,100.0 $4,700.0 $13,400.0 $69,075.0 15.93% $11,003.6 $2,396.4
3 $181,400.0 $67,500.0 $19,600.0 $47,900.0 $159,641.0 31.07% $49,600.5 ($1,700.5)
4 $196,900.0 $85,600.0 $24,300.0 $61,300.0 $205,744.0 28.72% $59,089.7 $2,210.3
5 $283,300.0 $130,600.0 $36,700.0 $93,900.0 $330,499.0 27.18% $89,829.6 $4,070.4
6 $237,000.0 $107,300.0 $31,200.0 $76,100.0 $387,244.0 19.63% $76,016.0 $84.0
7 $372,800.0 $153,800.0 $45,800.0 $108,000.0 $476,009.0 22.51% $107,149.6 $850.4
8 $204,100.0 $72,200.0 $22,400.0 $49,800.0 $353,520.0 14.87% $52,568.4 ($2,768.4)
9 $239,500.0 $70,300.0 $21,000.0 $49,300.0 $334,752.0 14.04% $46,999.2 $2,300.8

MVA Example

MARKET VALUE ADDED (MVA)
MVA is the difference between the market value of equity and the amount of equity capital
that investors have supplied.
MVA measures the amount of wealth a firm has created over time.
As such, it is the principal indicator of shareholder wealth maximization.
For the purpose of estimating MVA, the value of a firm equals the market value of its
debt and equity.
Year Market Value of Equity Plus: Market Value of Debt Equals: Market Value of Firm Minus: Total Capital Invested Equals: MVA
1 $75,000.0 $26,100.0 $101,100.0 $63,992.0 $37,108.0
2 $121,100.0 $22,800.0 $143,900.0 $69,075.0 $74,825.0
3 $354,200.0 $69,500.0 $423,700.0 $159,641.0 $264,059.0
4 $624,600.0 $61,200.0 $685,800.0 $205,744.0 $480,056.0
5 $1,034,800.0 $102,900.0 $1,137,700.0 $330,499.0 $807,201.0
6 $1,110,900.0 $89,600.0 $1,200,500.0 $387,244.0 $813,256.0
7 $1,414,200.0 $76,300.0 $1,490,500.0 $476,009.0 $1,014,491.0
8 $1,069,700.0 $63,000.0 $1,132,700.0 $353,520.0 $779,180.0
9 $985,500.0 $51,500.0 $1,037,000.0 $334,752.0 $702,248.0

EVA MVA Model

CALCULATION OF EVA AND MVA
Name of Company McCormick & Co. (MKC) Year 2014
Short-Term Debt $270,800.00 From Balance Sheet - End of Previous Year
Long-Term Debt $1,014,100.00 Preferred Dividend $ per share Preferred Stock Price per share From Balance Sheet - End of Previous Year
Preferred Stock $0.00 $0.00 $0.00 From Balance Sheet - End of Previous Year
Common Stock $995,600.00 From Balance Sheet - End of Previous Year
Paid-In Capital $0.00 From Balance Sheet - End of Previous Year
Retained Earnings $982,600.00 From Balance Sheet - End of Previous Year
Total Invested Capital $3,263,100.00 Computer Calculates
Price of Stock $88.49 Current Market Data
Number of Shares Outstanding 115,370.00 Yahoo Finance
EBIT $604,100.00 Calculate from Income Statement - Current Year
Tax Rate 24.15% Calculate from Income Statement (Taxes / Income Before Taxes)
Less: Taxes $145,890.15 Computer Calculates
Equals NOPAT $458,209.85 Computer Calculates
Rate on Short-Term Debt 3.50% From Form 10K Report or Current S-T Bond Data
Rate on Long-Term Debt 5.70% From Form 10K Report or Current L-T Bond Data
Market Risk Premium 5.50% Normally 5% - 6%; Use 5.5%
Risk-Free Rate (L/T Treasury bond) 3.00% Current Rate on 10yr. Treasury Bond
Debt to Equity Ratio 0.65 Computer Calculates
Beta of Stock 0.65 Yahoo Finance
Cost of Preferred Stock 0.00% Computer Calculates
Cost of Equity Capital 6.575% % S-T Debt % L-T Debt % Equity % Preferred Stock
WACC 6.05% 8.30% 31.08% 60.62% 0.00%
Analysis is Computer Generated
CALCULATION OF EVA - ECONOMIC VALUE ADDED
EBIT Less: Taxes Equals: NOPAT (Net Operating Profit After Tax) Equals: Invested Capital - Beginning of Period WACC Capital Charge EVA (NOPAT - Capital Charge)
$604,100.00 $145,890.15 $458,209.85 $3,263,100.00 6.05% $197,348.35 $260,861.50
Return on Invested Capital 14.04% NOPAT/Inv. Capital
Firm is Creating Shareholder Wealth
CALCULATION OF MVA - MARKET VALUE ADDED
Market Value of Equity Plus: Market Value of Debt Equals: Market Value of Firm Minus: Total Invested Capital Equals: MVA
$10,209,091.30 $1,284,900.00 $11,493,991.30 $3,263,100.00 $8,230,891.30
Firm is Creating Shareholder Wealth

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