6. The relationship between the book value of shareholders' equityand the firm's Market Value Added (MVA) and Economic Value Added (EVA)

Yesterday, Allied Biscuit Co. released its 2018 annual report on the companys website. While reading the report for her boss, Asha came across several terms about which she was unsure. She leaned around the wall of her cubicle and asked her colleague, Rafael, for help.

ASHA: Rafael, do you have a second to help me with my reading of Allied Biscuits annual report? Ive come across several unfamiliar terms, and I want to make sure that Im interpreting the data and managements comments correctly.

For example, one of the footnotes to the financial statements uses the book value of Allied Biscuits shares, and then in another place, it uses Market Value Added. Ive never encountered those terms before. Do you know what theyre talking about?

RAFAEL: Yes, I do. Let's see if we can make these terms make sense by talking through their meaning and their significance to investors. The term book value has several uses. It can refer to a single asset or the company as a whole. When referring to an individual asset, such as a piece of equipment, book value refers to the asset's adjusted for any accumulated depreciation or amortization expense. The value, or difference between these two values, is called the asset's book value. as reported In contrast, when the term refers to the entire company, it means the total value of the company's in the firm's RAFAEL: Yes, I do. Let's see if we can make these terms make sense by talking through their meaning and their significance to investors. The term book value has several uses. It can refer to a single asset or the company as a whole. When referring to an individual asset, such as a piece of equipment, book value refers to the asset's , adjusted for any accumulated depreciation or amortization expense. The value, or led the asset's book value. market value or replacement cost In contrast, when the term refers to the entire company, as reported historical value or original purchase price in the firm's RAFAEL: Yes, I do. Let's see if we can make these terms make sense by talking through their meaning and their significance to investors. The term book value has several uses. It can refer to a single asset or the company as a whole. When referring to an individual asset, such as a piece of equipment, book value refers to the asset's adjusted for any accumulated depreciation or amortization expense. The value, or difference between these two values, is called the asset's book value. as reported In contrast, when the term refers to the er gross pany, it means the total value of the company's in the firm's net RAFAEL: Yes, I do. Let's see if we can make these terms make sense by talking through their meaning and their significance to investors. The term book value has several uses. It can refer to a single asset or the company as a whole. When referring to an individual asset, such as a piece of equipment, book value refers to the asset's adjusted for any accumulated depreciation or amortization expense. The value, or difference between these two values, is called the asset's book value. as reported In contrast, when the term refers to the entire company, it means the total value of the company's in the firm's shareholders' equity ASHA: That makes sense. So, what makes this value important to investors is that it is total liabilities an change-but RAFAEL: Yes, I do. Let's see if we can make these terms make sense by talking through their meaning and their significance to investors. The term book value has several uses. It can refer to a single asset or the company as a whole. When referring to an individual asset, such as a piece of equipment, book value refers to the asset's , adjusted for any accumulated depreciation or amortization expense. The value, or difference between these two values, is called the asset's book value. as reported In contrast, when the term refers to the entire company, it means the total value of the company's in the firm's balance sheet ASHA: That mal this value important to investors is that it is value that can change-but only due to a statement of cash flows g the of Treasury stock, the sale of new common or preferred shares, and the payment of Equally important, it change in response to changes in the market prices of the firm's shares. ASHA: That makes sense. So, what makes this value important to investors is that it is value that can change-but only due to a couple of events, including the of Treasury stock, the sale of new common or preferred shares, and the payment of Equally important, it change in response to changes in the market prices of the firm's shares. ASHA: That makes sense. So, what makes this value important to investors is that it is value that can change-but only due to a couple of events, including the of Treasury stock, the or preferred shares, and the payment of Equally important, it change in response an expected future rket prices of the firm's shares. a historical ASHA: That makes sense. So, what makes this value important to investors is that it is value that can change-but only due to a couple of events, including the of Treasury stock, the sale of new common or preferred shares, and the payment of Equally importa change in response to changes in the market prices of the firm's shares. repurchase RAFAEL: Right! So, how useful would a firm's bo sale Ir assessing the performance of Allied Biscuit's management? ASHA: That makes sense. So, what makes this value important to investors is that it is value that can change-but only due to a couple of events, including the of Treasury stock, the sale of new common or preferred shares, and the payment of Equally important, it change in response to changes in the market prices of the firm's shares. RAFAEL: Right! dividends ful would a firm's book value be for assessing the performance of Allied Biscuit's management? interest ASHA: That makes sense. So, what makes this value important to investors is that it is value that can change-but only due to a couple of events, including the of Treasury stock, the sale of new common or preferred shares, and the payment of . Equally important, it change in response to changes in the market prices of the firm's shares. RAFAEL: Right! So, how useful would a firm's book va will assessing the performance of Allied Biscuit's management? will not II RAFAEL: Right! So, how useful would a firm's book value be for assessing the performance of Allied Biscuit's management? ASHA: Well, because Allied Biscuit's book value with changes in the market price of the firm's shares, the firm's book value reflect management's efforts to maximize the shareholder wealth and therefore be used to evaluate management's performance. Now, what about "Market Value Added"? ASHA: Well, because Allied Biscuit's book value with changes in the market price of the firm's shares, the firm's book value reflect management's efff e shareholder wealth and therefore be used to evaluate does not change management's performance. changes Now, what about "Market Value Added"? ASHA: Well, because Allied Biscuit's book value with changes in the market price of the firm's shares, the firm's book value reflect management's efforts to maximize the shareholder wealth and therefore be used to evaluate performance. cannot Now, ut "Market Value Added"? mana can ASHA: Well, because Allied Biscuit's book value with changes in the market price of the firm's shares, the firm's book value reflect management's efforts to maximize the shareholder wealth and therefore be used to evaluate management's performance. should not Now, what about "Market Value Added"? should RAFAEL: During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Market Value Added, or MVA, to better assess management's performance in maximizing their shareholders' wealth. To achieve this, a firm's MVA is computed as the between (of) the value and the value of Allied Biscuit's shareholders' equity. OK, now here's a question for you: Compared to the book value, what is the advantage of the MVA as a means of evaluating management's performance? ASHA: Well, I would say that because the market value of Allied Biscuit's shareholders' equity is calculated by multiplying the shares' by the number of shares ., then it will fluctuate depending on how the market perceives management's performance. A positive assessment will result in market price and MVA. RAFAEL: Nicely done! Does this make your reading of Allied Biscuit's annual report easier? RAFAEL: During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Market Value Added, or MVA, to better assess management's performance in maximizing their shareholders' wealth. To achieve this, a firm's MVA is computed as the between (of) the value and the value of Allied Biscuit's shareholders' equity. sum 's a question for you: Compared to the book value, what is the advantage of the MVA as a means of evaluating management's H difference ASHA: Well, I would say that because the market value of Allied Biscuit's shareholders' equity is calculated by multiplying the shares' by the number of shares then it will fluctuate depending on how the market perceives management's performance. A positive assessment will result in market price and MVA. r RAFAEL: Nicely done! Does this make your reading of Allied Biscuit's annual report easier? RAFAEL: During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Market Value Added, or MVA, to better assess management's performance in maximizing their shareholders' wealth. To achieve this, a firm's MVA is computed as the between (of) the value and the value of Allied Biscuit's shareholders' equity. OK, now here's a question for you: market to the book value, what is the advantage of the MVA as a means of evaluating management's performance? book ASHA: Well, I would say that because the market value of Allied Biscuit's shareholders' equity is calculated by multiplying the shares' by the number of shares then it will fluctuate depending on how the market perceives management's performance. A positive assessment will result in market price and MVA. RAFAEL: Nicely done! Does this make your reading of Allied Biscuit's annual report easier? RAFAEL: During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Market Value Added, or MVA, to better assess management's performance in maximizing their shareholders' wealth. To achieve this, a firm's MVA is computed as the between (of) the value and the value of Allied Biscuit's shareholders' equity. OK, now here's a question for you: Compared to the book valu market the advantage of the MVA as a means of evaluating management's performance? book ASHA: Well, I would say that because the market value of Allied Biscuit's shareholders' equity is calculated by multiplying the shares' by the number of shares then it will fluctuate depending on how the market perceives management's performance. A positive assessment will result in market price and MVA. RAFAEL: Nicely done! Does this make your reading of Allied Biscuit's annual report easier? RAFAEL: During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Market Value Added, or MVA, to better assess management's performance in maximizing their shareholders' wealth. To achieve this, a firm's MVA is computed as the between (of) the value and the value of Allied Biscuit's shareholders' equity. OK, now here's a question for you: Compared to the book value, what is the advantage of the MVA as a means of evaluating management's performance? ASHA: Well, I would say that because the market value of Allied Biscuit's shareholders' equity is calculated by multiplying the shares' by the number of shares , then it will fluctuate depending on how the market perceives performance. A positive assessment will result in market price and MVA. market price RAF par value e! Does this make your reading of Allied Biscuit's annual report easier? RAFAEL: During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Market Value Added, or MVA, to better assess management's performance in maximizing their shareholders' wealth. To achieve this, a firm's MVA is computed as the between (of) the value and the value of Allied Biscuit's shareholders' equity. OK, now here's a question for you: Compared to the book value, what is the advantage of the MVA as a means of evaluating management's performance? ASHA: Well, I would say that because the market value of Allied Biscuit's shareholders' equity is calculated by multiplying the shares' by the number of shares then it will fluctuate depending on how the market perceives management's performance. A positive assess in market price and MVA. outstanding RAFAEL: Nicely done! Does this make your readit repurchased uit's annual report easier? RAFAEL: During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Market Value Added, or MVA, to better assess management's performance in maximizing their shareholders' wealth. To achieve this, a firm's MVA is computed as the between (of) the value and the value of Allied Biscuit's shareholders' equity. OK, now here's a question for you: Compared to the book value, what is the advantage of the MVA as a means of evaluating management's performance? ASHA: Well, I would say that because the market value of Allied Biscuit's shareholders' equity is calculated by multiplying the shares' by the number of shares then it will fluctuate depending on how the market perceives management's performance. A positive assessment will result in market price and MVA. RAFAEL: Nicely done! Does this make your reading of Allied Biscuit's a decreased easier? an increased