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

MIA: Josh, do you have a second to help me with my reading of Galaxys 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 Galaxys shares, and then in another place, it uses Market Value Added. Ive never encountered those terms before. Do you know what theyre talking about?

JOSH: Yes, I do. Lets 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 assetshistorical value or original purchase price , adjusted for any accumulated depreciation or amortization expense. Thenet value, or difference between these two values, is called the assets book value.

In contrast, when the term refers to the entire company, it means the total value of the companystotal assets as reported in the firmsbalance sheet .

MIA: That makes sense. So, what makes this value important to investors is that it isa historical value that can changebut only due to a couple of events, including thesale of Treasury stock, the sale of new common or preferred shares, and the payment ofdividends . Equally important, itwill not change in response to changes in the market prices of the firms shares.

JOSH: Right! So, how useful would a firms book value be for assessing the performance of Galaxys management?

MIA: Well, because Galaxys book valuedoes not change with changes in the market price of the firms shares, the firms book valuecannot reflect managements efforts to maximize the shareholder wealth and thereforeshould not be used to evaluate managements performance.

Now, what about Market Value Added?

JOSH: During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Market Value Added, or MVA, to better assess managements performance in maximizing their shareholders wealth. To achieve this, a firms MVA is computed as the between (of) the value and the value of Galaxys shareholders equity.

OK, now heres a question for you: Compared to the book value, what is the advantage of the MVA as a means of evaluating managements performance?

MIA: Well, I would say that because the market value of Galaxys shareholders equity is calculated by multiplying the shares by the number of shares , then it will fluctuate depending on how the market perceives managements performance. A positive assessment will result in market price and MVA.

JOSH: Nicely done! Does this make your reading of Galaxys annual report easier?