Yesterday, Allied Biscuit Co. released its 2018 annual report on the company's 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 Biscuit'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 Allied Biscuit'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? 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. In contrast, when the term refers to the entire company, it means the total value of the company's the firm's ASHA: That makes sense. So, what makes this value important to investors is that it is only due to a couple of events, including the payment of Equally important, it . as reported in value that can change-but of Treasury stock, the sale of new common or preferred shares, and the change in response to changes in the market prices of the firm's shares.
Yesterday, Allied Biscuit Co. released its 2018 annual report on the company's 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 Biscuit'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 Allied Biscuit'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? 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. In contrast, when the term refers to the entire company, it means the total value of the company's the firm's ASHA: That makes sense. So, what makes this value important to investors is that it is only due to a couple of events, including the payment of Equally important, it . as reported in value that can change-but of Treasury stock, the sale of new common or preferred shares, and the change in response to changes in the market prices of the firm's shares.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Please answer the best you can
Transcribed Image Text:7. 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 company's 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 Biscuit'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 Allied Biscuit'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?
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.
In contrast, when the term refers to the entire company, it means the total value of the company's
the firm's
ASHA: That makes sense. So, what makes this value important to investors is that it is
only due to a couple of events, including the
payment of
Equally important, it
RAFAEL: Right! So, how useful would a firm's book value be for assessing the performance of Allied Biscuit's management?
value
value that can change-but
of Treasury stock, the sale of new common or preferred shares, and the
change in response to changes in the market prices of the firm's shares.
ASHA: Well, because Allied Biscuit's book value
with changes in the market price of the firm's shares, the firm's book
reflect management's efforts to maximize the shareholder wealth and therefore
be used to evaluate
management's performance.
Now, what about "Market Value Added"?
as reported in
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
value and the
value of Allied Biscuit's shareholders' equity.
between (of) the
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 how the market perceives management's
market price and MVA.
performance. A negative assessment will result in
RAFAEL: Nicely done! Does this make your reading of Allied Biscuit's annual report easier?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education