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Asmgnment 03 - FIanCIaI Statements, cash Flow, and Taxes Due on Sep 4 at11259 PM EDT 7. 111e relationship between Hie book value of shareholders' equity and the rm's Market a; Aa a Value Added (MVA) and Economic Value Added (EVA) Yesterday. Galaxy Corp. released its 2015 annual report on the company's website. While reading the report for her boss, Annie came across several terms about which she was unsure. She leaned around the wall of her cubicle and asked her colleague, Tristan. for help. Annie Tristan. do you have a second to help me with my reading of Galaxy's annual report? I've come across several unfamiliar terms, and I want to make sure that I'm interpreting the data and management's comments correctly. For example, one of the footnotes to the financial statements uses \"the book value of Galaxy's shares,\" and then in another place, it uses \"Market Value Added." I've never encountered those terms before. Do you know what they're talking about? o o o Tristan YE, 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 seveml uses. It can refer to a single asset or the company as a whole. When referring to an individual assetI such as a piece of equipment. book value refers to the asset's , adjusted for any accumulated depreciation or amortization expense. The valueI or difference between these two values. is called the ESETIE book value. In contrast, when the term refers to the entire company, it means the total value of the company's as reported in the flrm's o o o Annie That makes sense. So. what makes this value important to investors is that it is value that can changebut 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 Assignment 03 - Financial Statements, Cash Flow, and Taxes Due on Sep 4 at11159 PM EDT prices of the firm's shares. Tristan Right! So, how useful would a firm's book value be for assessing the performance of Galaxy's management? 0 c 0 Annie Well. because Gaiaxy's book value with changes in the market price of the firm's shares, the firm's book value reect management's efforts to maximize the price of the firm's common stock and therefore be used to evaiuate management's performance. Now, what about \"Market Value Added\"? 0 c c Tristan During the 19905, the consulting firm Stern, Stewart Bi Company developed the concept of Market Value Added, or MVA. to better assess management's performance in maximizing their shareholders' weaith. To achieve this, a firm's MVA is computed as the between the value and the value of Galaxy's shareholders' equity. OK, now here's a question for you: Compared to the book vaiue. what is the advantage of the MVA as a means of evaluating management's performance? 0 c 0 Annie Well. I would say that because the market value of Galaxy'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 negative assessment will result in market price and MVA. I I I Tristan Nicely done] Does this make your reading of Galaxy's annual report easier? Fash Player MAC zn,n,u,151 Q] 3 34 1 c: 2n-J4-2u1s Aplla All rlghts reserved , Q 2013 Cengage Learnlng Except a; named Ali ngm; resented 5\"\" i' "3\"\" 53\"" 5' Contmue
