The market value added is a concept in accounting that deals with the difference between the market value of the business and the capital invested to run the business. If the market value of the business is less than the cost of the capital invested to establish the business it means that management is inefficiently invested the capital in the business and doesn’t done a good job in creating and enhancing the market value of the business by effectively using the capital. The low market value also indicates that business has not make an efficient use of the capital invested by the investors and is not going to provide a good return on the investment to the investors.
In order to derive market value added a following few steps are taken:-
- All the common share outstanding are multiplied by their market price
- All the preferred shares outstanding are multiplied by their market price
- The two above mentioned figures are added to each other
- The amount of capital invested in the business is subtracted from the above mentioned figure
The formula of market value added can be shown as under:-
((Number of common share outstanding x market price of share) + (Number of preferred share outstanding x share price)) – Total Capital invested in the business
The market value added must be only used in the circumstances where the stock of the company is traded in a well established stock exchange.
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