Page 25 - FINAL CFA II SLIDES JUNE 2019 DAY 8

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EVA and MVA READING 32: RESIDUAL INCOME VALUATION
Measure the value added for shareholders by
management during a given year. MODULE 32.1: RESIDUAL INCOME DEFINED

Adjust AFS before calculating NOPAT and invested capital:
• Capitalize and amortize research and development
charges (rather than expense them), and add them back
to earnings to calculate NOPAT.
• Add back charges on strategic investments that will
generate returns in the future.
• Eliminate deferred taxes and consider only cash taxes as
an expenses.
• Treat operating leases as capital leases and adjust
nonrecurring items.
• Add LIFO reserve to invested capital and add back
change in LIFO reserve to NOPAT.
Market value added (MVA)
Difference between the market value of a firm’s long-term debt and equity and the book value of invested capital supplied by
investors. MVA = market value − total capital

EXAMPLE: Calculating EVA and MVA: VBM, Inc., reports NOPAT of $2,100, a WACC of 14.2%, and invested capital of $18,000 at the
beginning of the year and $21,000 at the end of the year. The market price (year-end) of the firm’s stock is $25 per share, and VBM has
800 shares outstanding. The market value (year-end) of the firm’s long-term debt is $4,000. Calculate VBM’s EVA and MVA.

Answer: First calculate EVA: The MV of the company is the MV of the equity plus the MV of the debt:
$WACC = 0.142 × $18,000 = $2,556 MV of company = ($25 × 800) + $4,000 = $24,000
EVA = $2,100 − $2,556 = –$456 MVA = $24,000 − $21,000 = $3,000