Question 11.RQ.3: Should managers take changes in the total market value of th...
Should managers take changes in the total market value of the shares (that is, share price × number of shares issued) over time as an indicator of shareholder value created (or lost)?
The problem with taking changes in the market value of the shares as an indicator of share-holder value created (or lost) is that it does not take account of capital required to generate that market value. Let us assume there are two companies, A and B, which each start with £100 million capital invested. After two years, let us assume that the market value of A is £250 million and the market value of B is £300 million. However, B raised £80 million in additional capital to finance the business. Although B has a higher market value after two years, it has been achieved through a much higher level of capital invested. MVA takes the difference between the market value and the capital invested and so avoids this problem.