URGENT- MVA/EVA ??????????

CFA Level II
#1

Guys

in calculating Market valued added or invested capital do we only consider long term debt:?

also in Enterprise value is only long term included?

#2

you in the wrong forum? Lvl II ?

#3

Wow, feel like last minute fire-fighting here. Nevertheless…

  1. MVA

conceptually mean the market value the management created over the book value of firm value_._

MVA = MV of the firm - BV of the firm (approximation)

If you are an*l freak like me, the proper formula is

MVA = MV of Debt + MV of Equity - BV of Debt - BV of Debt or

MVA = NPV of all the future EP discounted at WACC

Ans: MVA is the market value created by the mgmt. And I don’t know how to directly answer your question .

  1. Invested Capital

Conceptually mean the money provided by debt AND equity capital providers. There are two types

(a) Book value: BVIC = BV of Equity + BV of Debt = (Net) WC + Net fixed assets

(b) Market value: MVIC = Firm value = MV of Debt + MV of Equity

Ans: No matter measured at BV or MV, LTD is included in IC.

  1. EV

Conceptually mean the firm value to a potential acquirer, meaning you add back the debt you are gonna assume but minus out the cash & investments you now can access to after the M&A. Typically divided by with EBTIDA to meaure how fast you can recoup back your initial investment, especially in Private Equity deal.

EV = MV of Equity or just Market Cap. + MV of Debt - Cash & Investments

If you want to have more fun, the EV formula can extend to

EV = MV of Equity + MV of Debt + MV of Preferred Shares + Minority Interest - Cash & Investments

Ans: Yes, EV contains LTD.

If anyone can help check the accuracy of my comments, that would be wonderful.

1 Like
#4

Sounds correct, but does MV of Debt includes both LTD and STD?

And what do you mean by “(net) WC”?

#5

  1. Is this the issue everyone is killing one another for in another thread? I personally think that anything that is interest-bearing is debt. So ya, both of them.

  2. WC = CA - CL So WC is essentially a net-out-with-CL figure, so WC = net WC

#6

Yes, I agree, all interest bearing debt. And yes, theoretically, BV debt + BV equity should equal (net) wc and NFA. Not always the case. For the exam, I’m using all debt except current liabilities (other than short term debt).

My question on MVA, if we just take the market value of the debt and market cap (for the stock), do we still included retained earnings in the subtraction? Or just book value of common stock?

#7

Total Equity = Retained Earnings + Common stock (simplification)

I think we can view retained earnings as REINVESTED capital by the equity capital providers, so retained earnings is included in the total equity.

Actually, stock price (market value) reflects their claims to the retained earnings stored in the company BS because when company goes ex-dividend, stock price drops a bit right?

#8

Yeah this a good point. Makes sense that retained earnings should be reflected in the current share price. If earnings have been reinvested, price should go up on perceived future growth. If they’ve been paid out in dividends, the price should fall by the amount of the dividend (given the taxes on dividends = capital gains). So I’m at peace with using all of equity in invested capital calulation.