Question

Over the years, Masterson Corporation’s stockholders have provided $34,000,000 of capital when they purchased new issues of stock and allowed management to retain some of the firm’s earnings. The firm now has 2,000,000 shares of common stock outstanding, and the shares sell at a price of $28 per share. How much value has Masterson’s management added to stockholder wealth over the years, that is, what is Masterson’s MVA?

Answer 1

Masterson Corporation's MVA is calculated by subtracting the capital provided by shareholders ($34,000,000) from the market value of the firm's equity ($56,000,000), resulting in an MVA of $22,000,000. This represents the value added to stockholder wealth by the management.

Step-by-step explanation:

To calculate Masterson Corporation's Market Value Added (MVA), we must find the difference between the market value of the firm's equity and the capital contributed by shareholders. The market value is determined by multiplying the number of shares outstanding by the current share price. Then, we subtract the capital provided by shareholders from the market value to find the MVA.

With 2,000,000 shares outstanding and a share price of $28, the market value is 2,000,000 shares × $28/share = $56,000,000. The shareholders provided $34,000,000 of capital. Therefore, Masterson's MVA is $56,000,000 (market value) - $34,000,000 (shareholder capital) = $22,000,000. This figure represents the value Masterson's management has added to stockholder wealth over the years.

Answer 2

Answer: MVA = $22,000,000

Step-by-step explanation:

Given:

Initial capital = $34,000,000

No. of shares of common stock = 2,000,000

Price of each share = $28

We can compute the MVA using the following formula,

MVA = Current market value - Initial capital provided

where,

Current market value = No. of shares of common stock × Price of each share

= 2,000,000 × $28

= $56,000,000

Therefore,

MVA = $56,000,000 - $34,000,000

MVA = $22,000,000