Mcdonalds Essay

2467 Words Oct 12th, 2012 10 Pages
Economic Value Added (EVA)

EVA is not actually a new discovery. The concept of EVA has been described in the first theoretical basis of capital structure and company value was presented in the academic papers by two financial economists, Franco Modigliani and Merton H. Miller in 1958, later has been known as M&M (Modigliani-Miller) theorem. The basic theorem states that the value of a firm is unaffected by how the firm is financed, whether by issuing stock or selling debt.
However, Modigliani and Miller did not provide a technique to measure economic income in a firm. “The EVA Challenge: Implementing Value Added Change in an Organization”, he proposes that the EVA program encompasses three things essentially, which are a
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If market values of debt and preferred stock equal their values as reported on the financial statements, then MVA is the difference between the market value of a firm’s stock and the amount of equity its shareholders have supplied. Therefore, MVA is a tool in determining how much money investors have made on their investment and the level of value a company has accumulated over time (company’s wealth). The positive MVA indicates that the value and investment created by the manager is more than the capital supplied by the investors, vice versa. Formula of MVA is proposed by Brigham and Ehrhardt (2002):
MVA = Total Market Value – Total Capital
= (MV of Stock + MV of Debt) – Total Capital
Where,
MV of Stock = Market Capitalization = Shares Outstanding x Stock Price
MV of Debt ≈ Book Value of Debt (as an estimate to the MV)
Total Capital = Total Book Value of Debt and Equity
In the formula above, the market value of debt is deemed to be equivalent with the book value of debt since there is no active secondary debt market in Indonesia; therefore, it is hard to estimate the market value for the debt.
MVA is deemed to have the highest relationship with EVA rather than other financial measures. There are two observations of EVA and MVA stated by Brigham and Ehrhardt
(2002): First, there is a direct relationship between MVA and EVA. If a company has a history of negative EVAs, then its MVA will probably be negative, and vice versa if it has a

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