14. Value added to a firm A traditional (ratio-based) financial statement analysis, which relies almost exclusively...

Transcribed Image Text:

14. Value added to a firm A traditional (ratio-based) financial statement analysis, which relies almost exclusively on book value-based accounting information, cannot directly assess the relationship between a company's financial performance and shareholder wealth (as measured by the market price of the firm's common stock). To address this deficiency, Stern Stewart & Company developed two additional performance indicators: Market Value Added (MVA) and Economic Value Added (EVA). The MVA measures the amount of wealth generated by the firm since it was created, while the EVA measures the amount of shareholder wealth that the firm's management has added to the firm's value during a period of time. If the EVA is positive, then management has added value, while a negative value indicates that the firm's managers reduced the firm's value and shareholders might have earned more value by investing in some other investment with the same level of risk. The EVA metric effectively measures the amount of shareholder wealth that the firm's management has time. A during a specific period of EVA value indicates that the firm's managers have reduced the firm's value, and shareholders might have earned more value by investing in some other investment with the same risk level. 14. Value added to a firm A traditional (ratio-based) financial statement analysis, which relies almost exclusively on book value-based accounting information, cannot directly assess the relationship between a company's financial performance and shareholder wealth (as measured by the market price of the firm's common stock). To address this deficiency, Stern Stewart & Company developed two additional performance indicators: Market Value Added (MVA) and Economic Value Added (EVA). The MVA measures the amount of wealth generated by the firm since it was created, while the EVA measures the amount of shareholder wealth that the firm's management has added to the firm's value during a period of time. If the EVA is positive, then management has added value, while a negative value indicates that the firm's managers reduced the firm's value and shareholders might have earned more value by investing in some other investment with the same level of risk. The EVA metric effectively measures the amount of shareholder wealth that the firm's management has time. A during a specific period of EVA value indicates that the firm's managers have reduced the firm's value, and shareholders might have earned more value by investing in some other investment with the same risk level.