Investment and security subject class short presentation of Market to book value ratio and EVA economic value Added

1. SUBJECT:-
INVESTMENTS AND SECURITIES
TOPIC:-
MARKET VALUE TO BOOK VALUE RATIO
AND ECONOMIC VALUE ADDED EVA

2. MARKET TO BOOK VALUE RATIO/PRICE TO
BOOK RATIO:-
 The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a
company's current market price to its book value. It is also sometimes known
as a Market-to-Book ratio and its inverse is called the book-to-market ratio.
 Market Price:-
 The current price at which an asset or service can be bought or sold. In regard to
stocks, the market price of a stock is the most recent price at which the stock was
traded.
Book Value:-
 the value of a security or asset as entered in a firm's books or Written down value
of an asset as shown in the firm's balance sheet. To determine book value A
company's total assets will be minus form intangible assets and liabilities.

3.  There are two ways to calculate this ratio and the result are same in both
ways so here we use the one simple way to calculate this ratio as under.
To calculate the market to book value ratio divide the company's current
share price by the book value per share
 Mathematically it can be written as:
 Market-to-book ratio =current share price/book value of firm.
CALCULATION METHOD:-

4. HOW TO CALCULATE THE MARKET TO BOOK
VALUE RATIO:-
 There are a couple ways to calculate book value, depending on the company.
For purposes of this example, we'll assume that the best measure of book
value is Total Assets - Total Liabilities. We'll also assume that the stock of
Company XYZ is trading at $6 per share and there are 100 shares outstanding.
 Balance Sheet for Company XYZ
 Year ending December 31, 2009
 Assets
 Cash 1,000
 Accounts Receivable 500
 Inventory 500
 Total Current Assets 2,000

5. CONTINUED
 Liabilities
 Accounts Payable 500
 Current Long-Term Debt 500
 Total Current Liabilities 1,000
 Long Term Debt 500
 Total Liabilities 1,500
 Owners' Equity 500
 P/B ratio = Stock Price / Book Value per share
Book value: 2,000 - 1,500 = 500
Book value per share: 500 / 100 =
$5
P/B ratio OR m/b = $6 / $5 = 1.2

6.  A P/B ratio of less than 1.0 can indicate that a stock is undervalued, while a
ratio of greater than 1.0 may indicate that a stock is overvalued.
 In the above example ratio is 1.2 so it overvalued.
 ECONOMIC VALUE ADDED:-
 A measure of a company's financial performance based on the residual wealth
calculated by deducting cost of capital from its operating profit
 The formula for calculating EVA is as follows:
 = Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)
 After-tax profit that exceeds the required minimum return on capital.
Computed by deducting the cost of capital (both debt and equity) from the
after-tax profit, it is said to be the best measure of the true profitability of an
enterprise, and is tied to cash flow and not to earnings per share (EPS). EVA is
a registered trademark of the US firm, Stern Stewart & Company.

7.  In finance, economic value added (EVA) measures the net value added by a
company during a period. It equals net operating profit after tax minus average cost
of capital employed.
 If economic value added (EVA) for a period is positive, it means the management
has increased the company's total worth. On the other hand, if the economic value
added is negative it means that the cost of capital employed is greater than the
profit generated by the company and this means a decline in the company's value
over the period.
EXAMPLE:-
 Stark Industries' earnings before interest and taxes for the financial year 2011
amounted to $5,130 million. Applicable tax rate is 35%. 60% of the company's
assets are financed by debt which has an after tax cost of 3.8%, while 40% is
financed by equity with a cost of 9.8%. Stark Industries average total capital
employed over the period amounted to $50,420 million. Find Stark Industries'
economic value added.

8. Economic Value Added = NOPAT − WACC × Capital Employed
NOPAT = EBIT × (1 − Tax Rate) = $5,130 million × (1 − 35%) = $3,334 million
WACC = 0.6 × 3.8% + 0.4 × 9.8% = 6.2%
Economic Value Added = $3,334 million − 6.2% × $50,420 = $208 million
This tells us that over the financial year 2011, Stark Industries added a total of
$208 million to its value.