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354 CHAPTER 9 Financial Statements, Cash Flow, and Taxes

As noted earlier, a negative current FCF is not necessarily bad, provided it is due

to high growth. For example, Home Depot has negative FCF due to its rapid growth,

but it also has a very high ROIC, and this high ROIC results in a high market value for

the stock.

MicroDrive had an ROIC in 2002 of 9.46 percent ($170.3/$1,800 0.0946). Is

this enough to cover its cost of capital? We’ll answer that question in the next section.

What is net operating working capital? Why does it exclude most short-term in-

vestments and also notes payable?

What is total operating capital, or, equivalently, total operating assets? Why is it

important for managers to calculate a company’s capital requirements?

What is NOPAT? Why might it be a better performance measure than net income?

What is free cash flow? Why is free cash flow the most important determinant of

a firm’s value?

MVA and EVA

Neither traditional accounting data nor the modified data discussed in the preceding

section bring in stock prices, even though the primary goal of management is to max-

imize the firm’s stock price. Financial analysts have therefore developed two new per-

formance measures, MVA, or Market Value Added, and EVA, or Economic Value

Added. These concepts are discussed in this section.^8

Market Value Added (MVA)

The primary goal of most firms is to maximize shareholders’ wealth. This goal obvi-

ously benefits shareholders, but it also helps to ensure that scarce resources are allo-

cated efficiently, which benefits the economy. Shareholder wealth is maximized by

maximizing the differencebetween the market value of the firm’s stock and the amount

of equity capital that was supplied by shareholders. This difference is called the Mar-

ket Value Added (MVA):

MVA Market value of stock 
Equity capital supplied by shareholders

(Shares outstanding)(Stock price) 
Total common equity. (9-9)

To illustrate, consider Coca-Cola. In late 2001, its total market equity value was

$123.5 billion, while its balance sheet showed that stockholders had put up only $10.4

billion. Thus, Coca-Cola’s MVA was $123.5 
$10.4 $113.1 billion. This $113.1

billion represents the difference between the money that Coca-Cola’s stockholders

have invested in the corporation since its founding—including retained earnings—

versus the cash they could get if they sold the business. The higher its MVA, the bet-

ter the job management is doing for the firm’s shareholders.

Sometimes MVA is defined as the total market value of the company minus the to-

tal amount of investor-supplied capital:

MVA Total market value 
Total capital

(Market value of stock Market value of debt) 
Total Capital. (9-9a)

(^8) The concepts of EVA and MVA were developed by Joel Stern and Bennett Stewart, co-founders of the
consulting firm Stern Stewart & Company. Stern Stewart copyrighted the terms “EVA” and “MVA,” so
other consulting firms have given other names to these values. Still, EVA and MVA are the terms most com-
monly used in practice.
For an updated estimate of
Coca-Cola’s MVA, go to
http://finance.yahoo.com,
enter KO, pick Detailed for
the quote, and click Get.
This shows the market value
of equity, called Mkt Cap. To
get the book value of equity,
select Research, then Finan-
cials, and then Balance
Sheet.

350 Financial Statements, Cash Flow, and Taxes