Yesterday, Allied Biscuit Co$.$ released its $2018$ annual report on the company's website. While reading the report for his boss, Alexis came across several terms about which he was unsure. He learned around the wall of his cubicle and asked his colleague, Claire, for help. Alexis: Claire, do you have a second to help me with my reading of Allied Biscuit's annual report? I've come across several unfamiliar terms, and I want to make sure that I$\text{'}$m interpreting the data and management's comments correctly. For example, one of the footnotes to the financial statements uses "the book value of Allied Biscuit's shares," and then in another place, it uses "Economic Value Added." I've never encountered those terms before. So you know what they're taking about? Claire: 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 $($market value$/$replacement cost or historical value$/$original purchase price$),$ adjusted for any accumulated depreciation or amortization expense. The $($net or gross$)$ value, or difference between the machine's historical cost and its accumulated depreciation expense, is called its book value. In contrast, when the term refers to the entire company, it means the total value of the company's $($total liabilities or shareholders' equity$)$ as reported in the firm's $($balance sheet or statement of cash flows$).$ Alexis: That makes sense. So$,$ what makes this value important to investors is that it is $($an expected future or a historical$)$ value that can change $-$ but only due to a couple of events, including the $($repurchase or sale$)$ of Treasury stock, the sale of new common or preferred shares, and the payment of $($dividends or interest$).$ Equally important, it $($will or will not$)$ change in response to changes in the market prices of the firm's shares. Claire: Right! So$,$ how useful would a firm's book value be for assessing the performance of Allied Biscuit's management? Alexis: Well, because Allied Biscuit's book value $($changes or does not change$)$ with changes in the market price of the firm's shares, the firm's book value $($can or cannot$)$ reflect management's efforts to maximize the shareholder wealth and therefore $($should or should not$)$ be used to evaluate management's performance. Now, what about "Economic Value Added?" Claire: During the $1990$s$,$ the consulting firm Stern, Stewart & Company developed the concept of Economic Value Added, or EVA, to better assess management's performance in maximizing their shareholders' wealth. Allied Biscuit'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 Allied Biscuit's $($annual dollar cost of debt or annual dollar cost of capital$)$ from its $($operating profit or net operating profit after taxes$).$ In turn, Allied Biscuit's annual cost of capital is calculated by multiplying its total $($creditor$-$supplied or investor$-$supplied$)$ 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 Allied Biscuit's management? Alexis: Give me a second to think $...$ OK$,$ it's better to evaluate the performance of Allied Biscuit's 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 $($greater or less$)$ the after$-$tax net operating income earned, the $($greater or less the difference between this net operating income and the cost of capital needed to generate that income, and the $($greater or less$)$ the Eva, or true economic profit, earned by the company. Claire: Nicely done! Does this make your reading of Allied Biscuit's annual report easier?