The market value added concept derives the difference between the market value of a business and the cost of the capital invested in it. When market value is less than the cost of invested capital, this implies that management has not done a good job of creating value with the equity made available to it by investors.

1. Multiply the total of all common shares outstanding by their market price
2. Multiply the total of all preferred shares outstanding by their market price
3. Combine these totals
4. Subtract the amount of capital invested in the business

The formula is:

(Number of common shares outstanding x share price) + (Number of preferred shares outstanding x share price)
- Book value of invested capital

As an example, the investor relations officer of Cud Farms is preparing a press release that reveals the increase in market value added since the new management team was hired. The analysis is based on the following information:

 Prior Year Current Year Number of common shares outstanding 5,000,000 5,700,000 Common stock price \$4.00 \$4.20 Number of preferred shares outstanding 400,000 375,000 Preferred share price \$11.00 \$11.30 Book value of invested capital \$18,000,000 \$20,625,000

The market value added for the prior year is calculated as follows:

(5,000,000 Common shares x \$4.00 price) + (400,000 Preferred shares x \$11.00 price) - \$18,000,000 Equity book value

The market value added for the current year is calculated as follows::

(5,700,000 Common shares x \$4.20 price) + (375,000 Preferred shares x \$11.30 price) - \$20,625,000 Equity book value