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Correctly answered each part of question #7
7. The relationship between the book value of shareholders equity and the firms Market Aa Aa Value Added (MVA) and Economic Value Added (EVA) Yesterday, Water and Power Co. released its 2015 annual report on the companys website. While reading the report for her boss, Madison came across several terms about which she was unsure. She leaned around the wall of her cubicle and asked her colleague, Taj, for help. Madison Taj, do you have a second to help me with my reading of Water & Powers 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 Water& Powers shares, and then in another place, it uses Market Value Added. Ive never encountered those terms before. Do you know what theyre talking about? Taj 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 assets or amortization expense. The the assets book value. , adjusted for any accumulated depreciation value, or difference between these two values, is called In contrast, when the term refers to the entire company, it means the total value of the companys as reported in the firms
Madison That makes sense. So, what makes this value important to investors is that it is Treasury stock, Equally important, it value that can change-but only due to a couple of events, including the the sale of new common or preferred shares, and the payment change in response to changes in the market of prices of the firms shares. Taj Rightl So, how useful would a firms book value be for assessing the performance of Water & Powers management? Madison Well, because Water&Powers book value with changes in the market price reflect managements efforts to maximize of the firms shares, the firms book value the price of the firms common stock and therefore managements performance. be used to evaluate Now, what about Market Value Added? Taj During the 1990s, the consulting firm Stem, 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 the value and the value of Water & Powers 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? Madison Well, I would say that because the market value of Water & Powers 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.
Taj Nicely donel Does this make your reading of Water & Powers annual report easier?
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Homework Answers

Answer #1

The possible solution for the fill in the blanks may be;

1. Original Purchase Price recorded in the books

2. Net

3. Stock holder's equity

4. Balance sheet

5. Historical

6. Sale

7. Dividend

8. will not

9. Does not changes

10. Cannot

11. Should not

12. Difference

13. Market

14. Book

15. Market Price

16. Outstanding

17. Increase

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