03: Assignment- Financial Statement, Cah Fow, arid laxes Mia Right! So, how useful would a firm's book value be for assessing the performance of Extensive's management? with changes in the market price of reflect management's efforts to maximize the be used to evaluate management's Josh Well, because Extensive's book value the firm's shares, the firm's book value price of the firm's common stock and therefore performance Now, what about "Economic Value Added"? During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Economic Value Added, or EVA, to better assess management's performance in maximizing their Mia shareholders' wealth Extensive's EVA equals the additional profit created in excess of the after-tax operating income necessary to finance its total after-tax cost of capital, which is expressed in annual dollars. It is computed by subtracting Extensive's annual dollar cost of capital from its net operating profit after taxes In turn, Extensive's annual cost of capital is calculated by multiplying its total operating capital, which includes its net fixed assets and net operating working capital, by the after-tax percentage cost of capital OK, given that description, here's a question for you: Compared to the book value, what is the advantage of using the EVA to evaluate the performance of Extensive's management? Josh Give me a second to think... OK, it's better to evaluate the performance of Extensives management by using the company's EVA rather than the book value of its shareholders' equity because the better the managerial decisions being made, the the after-tax net operating income earned, the the difference between this net operating income and the cost of capital needed to generate that income, and the the EVA, or true economic profit, earned by the company