SHAREHOLDERS VALUE ADDED and Market Value Added

SHAREHOLDERS VALUE ADDED and Market Value Added and Economic vallue added

1. SHAREHOLDERS VALUE ADDED Shareholder Value Added (SVA) is a financial metric that measures the value a company has added for its shareholders over time. It is calculated by subtracting the cost of capital from the net operating profit after taxes (NOPAT).

2. Formula of shareholders value added SVA=NOPAT− CC Here: SVA= Sahreholders Value Added NOPAT= Net Operating profit After Tax CC= Cost of Capital

3. Here's a step-by-step guide on how to calculate Shareholder Value Added with numerical examples:

4. Step 1: Calculate Net Operating Profit After Taxes (NOPAT) NOPAT=EBIT×(1−T) Where: EBIT (Earnings Before Interest and Taxes) is the company's operating profit. T is the corporate tax rate.

5. Step 2: Calculate the Cost of Capital Cost  of Capital=Capital  Employed×Weighted  Average Cost of Capital (WACC ) Where : Capital Employed is the total amount of capital used by the company (Equity + Debt). WACC is the weighted average cost of capital, calculated as follows: WACC= Weight of  Equity×Cost  of  Equity+Weight  of  Debt×Cost  of Debt×(1−T ) Weight  of  Equity+Weight  of  Debt

6. Step 3: Calculate Shareholder Value Added (SVA) SVA=NOPAT −Cost of Capital

7. Now, let's work through a numerical example: Suppose a company has: EBIT = $500,000 Tax rate (T ) = 30% Equity = $1,000,000 Debt = $500,000 Cost of Equity = 10% Cost of Debt = 5%

8. Step 1: Calculate NOPAT NOPAT=EBIT×(1−T ) NOPAT=$500,000×(1−0.30)=$ 350,000 NOPAT =$500,000×(1−0.30)=$350,000

9. Step 2: Calculate WACC WACC= Weight of  Equity×Cost  of  Equity+Weight  of  Debt×Cost  of Debt×(1−T) Weight  of  Equity+Weight  of Debt WACC= $1,000,000×0.10+$500,000×0.05×(1−0.3 ) $ 1,000,000+$ 500,000 WACC= $ 100,000+$ 22,500 $1,500,000 = 0.0833 or 8.33 %

10. Step 3: Calculate SVA SVA=NOPAT−Cost of Capital SVA =$350,000−($1,500,000×0.0833 ) SVA= $350,000 −$ 124,950 SVA=$225,050 So , the Shareholder Value Added (SVA) for this example is $225,050. This positive value indicates that the company has added value for its shareholders.

11. Market Value Added Market Value Added (MVA) is a financial metric used in financial statement analysis to assess the value a company has added to its shareholders' wealth. It is calculated by taking the difference between the market value of a company's equity and the total capital invested in it.

12. The formula for MVA MVA =Market  Value of Equity−Total Capital Invested

13. Market Value of Equity (MVE): This is the total market value of a company's outstanding shares of stock. It is calculated by multiplying the current market price per share by the total number of outstanding shares . MVE =Current Market Price per  Share × Number  of Outstanding Shares

14. Total Capital Invested: This includes the total capital that has been invested in the company, which is the sum of equity and debt. The formula for total capital is: Total  Capital= Equity + Debt

15. Company XYZ has the following financial information: Current market price per share: $50 Number of outstanding shares: 1 million Equity: $30 million Debt: $20 million

16. First, calculate the market value of equity (MVE): MVE = Current Market Price of Share X No. of shares outstanding MVE = $50 X 1,000,000 = $ 50,000,000 Next, calculate the total capital : Total Capital =Equity + Debt = $30,000,000 + $20,000,000 = $50,000,000

17. Now, apply the MVA formula : MVA=Market  Value of Equity−Total Capital  Invested MVA = $50,000,000 - $50,000,000 = $ the Market Value Added is $0, indicating that the market value of equity is equal to the total capital invested. A positive MVA would suggest that the company has added value for its shareholders, while a negative MVA would imply the opposite.

18. ECONOMIC VALUE ADDED

19. Economic Value Added (EVA) is a financial performance metric that measures the difference between a company's net operating profit after taxes (NOPAT) and the opportunity cost of its capital. EVA is considered a useful tool for financial statement analysis as it provides insight into how well a company is utilizing its capital to generate returns.

20. The formula for Economic Value Added is: EVA = NOPAT −( Capital ∗ WACC ) where: NOPAT (Net Operating Profit After Taxes) is the company's operating profit after taxes. Capital is the total capital employed by the company. WACC (Weighted Average Cost of Capital) is the weighted average cost of the company's debt and equity.

21. Net Operating Profit After Taxes (NOPAT): NOPAT is a company's operating profit adjusted for taxes. It represents the profit generated from a company's core operations. NOPAT = OperatingIncome ×(1− TaxRate )

22. Capital Employed: Capital employed is the total amount of capital used by a company to generate profits. It includes both equity and debt. The formula for capital employed is: Capital = Equity + Debt − Cash where Equity is the shareholders' equity, Debt is the total debt, and Cash is the cash and cash equivalents.

23. Weighted Average Cost of Capital (WACC ) WACC represents the average cost of the company's capital, taking into account the cost of both debt and equity. The formula for WACC is: WACC =( E ​ × Re )+( D ​ × Rd ×(1− TaxRate ) V V where E is the market value of equity, D is the market value of debt, V is the total market value of equity and debt, Re is the cost of equity, Rd is the cost of debt, and the Tax rate is the corporate tax rate.

24. Let's say Company ABC has an NOPAT of $5 million, total equity of $20 million, total debt of $10 million, and a cash balance of $2 million. The corporate tax rate is 30%, the cost of equity is 10%, and the cost of debt is 5%.

25. Ca [ pital Employed = Equity + Debt - Cash Capital Employed = 20 M + 10 M - 2 M =28 M WACC =( E ​ × Re )+( D ​ × Rd ×(1− TaxRate ) V V = (20M/28M X0.10) + (10M/28M X 0.05 X (1 – 0.30) = (0.071M + 0.018 M) + (0.018M X 0.70) = 0.089 M + 0.0126M =0.1016 M (OR ) 101600

26. EVA = NOPAT −( Capital ∗ WACC ), = 5M –(28M *0.1016M) = 5M -2.8448 M = 2.1552 M This will give you the Economic Value Added for Company ABC. A positive EVA indicates that the company is generating returns above the cost of capital, while a negative EVA suggests that the company is not covering its capital costs.

27. Wealth Generated & Distributed Statements Financial statement analysis involves the examination of a company's financial statements to assess its financial health and performance. Wealth generation and distribution are key aspects of financial statement analysis, and they can be understood through various financial metrics and statements. Here's how wealth generation and distribution are reflected in financial statements:

28. 1. Income Statement: Wealth Generation: The income statement, also known as the profit and loss statement, provides information about a company's revenues, expenses, and profits over a specific period. Positive net income indicates wealth generation, as it represents the profit earned by the company.

29. Wealth Distribution: Dividends paid to shareholders are a form of wealth distribution. The income statement does not explicitly show dividends, but retained earnings (net income minus dividends) on the statement of changes in equity reflects the portion of wealth retained for business growth rather than distributed to shareholders.

30. 2. Balance Sheet : Wealth Generation: The balance sheet provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. Positive equity, represented by assets exceeding liabilities, indicates wealth generation. Wealth Distribution : Dividends paid are also reflected in the balance sheet under the equity section as a reduction in retained earnings.

31. 3. Statement of Cash Flows : Wealth Generation: Positive cash flow from operating activities indicates the generation of cash wealth from the company's core business operations. Wealth Distribution: Cash payments for dividends are reported in the financing activities section, reflecting the distribution of wealth to shareholders.

32. 4. Statement of Changes in Equity : Wealth Generation: This statement shows changes in equity accounts over a specific period. Net income contributes to wealth generation, increasing equity. Wealth Distribution: Dividends paid reduce retained earnings, representing the distribution of wealth to shareholders.

33. 5. Financial Ratios : Return on Equity (ROE): This ratio indicates how effectively a company generates profit from shareholders' equity, providing insights into wealth generation. Dividend Payout Ratio: This ratio measures the proportion of earnings paid out as dividends, indicating the extent of wealth distribution.

34. Conclusion Financial statement analysis allows stakeholders to assess a company's ability to generate wealth through profitability and efficient use of resources. It also helps in understanding how the company distributes wealth, whether through dividends or retained earnings for future growth. By analyzing various financial metrics and statements, investors and analysts can gain insights into a company's overall financial performance and health.