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Explanations of EVA, MVA and NPV and

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Introduction

Explanations of EVA, MVA and NPV and their relationship with each other The concept of EVA is a measure of economic profit and was popularised and originally trade-marked by Stern Stewart Consulting Company in the 1980's. Economic Value Added (EVA) can be defined as the difference between net operating profit after taxes and the monetary value of a company's total cost of capital. Should a company's profit exceed the overall costs of funds they create EVA. It can be so important because EVA is the most efficient internal measure of the true economic profit of a company. Managers within any company can use this measure in order to obtain any crucial information they may need when making crucial decisions. When broken up EVA can simply be defined as an estimate of the amount by which earnings exceed or fall short of the required lowest rate of return that shareholders could receive by investing in the company. ...read more.

Middle

In order to see whether a value has been added, or destroyed, to the company over a period of time the difference in MVA from one date to a the next should be calculated. With MVA representing the stock markets assessment of a company it can be derived that the higher the MVA the better as this would represent greater wealth for the shareholders. The finance decision model Net Present Value (NPV) can be defined as the difference between the present value of an investment's future net cash flows less the initial investment. The result of NPV expresses how much value an investment will result in which is done by measuring over a period of time all cash flows, and back towards the present time. Should the result of the NPV method be positive, should there not be a better investment anywhere else, it can be concluded that an investment should be made. ...read more.

Conclusion

If debt is used in the right way, it can help to lower the WACC, so it must be made sure that the WACC calculation has taken account of all factors that could affect it. A company's WACC is a very important figure, both to the stock market for stock valuation purposes and to the company's management for capital budgeting purposes. In an analysis of a potential investment by the company, investment projects that have an expected return that is greater than the company's WACC will generate additional free cash flow and will create positive net present value for stock owners. These corporate investments should result in an increase in stock prices. These are the projects that should be invested in. Investments that earn less than the firm's WACC will result in a decrease in stockholder value and should be avoided by the company. So, in other words the WACC must be looked at to see if the current capital structure of the company is in good shape and will benefit any investors. ...read more.

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