7. The relationship between the book value ofshareholders' equity and the firm's Market Value Added (MVA) andEconomic Value Added (EVA) Yesterday, Water and Power Co. released its 2015 annual reporton the company’s website. While reading the report for her boss,Asha came across several terms about which she was unsure. Sheleaned 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 ofWater & Power’s annual report? I’ve come across severalunfamiliar terms, and I want to make sure that I’m interpreting thedata and management’s comments correctly. For example, one of the footnotes to the financial statementsuses “the book value of Water & Power’s shares,” and then inanother place, it uses “Market Value Added.” I’ve never encounteredthose terms before. Do you know what they’re talking about? RAFAEL: Yes, I do. Let’s see if we can make these terms makesense by talking through their meaning and their significance toinvestors. The term book value has several uses. It can refer to a singleasset or the company as a whole. When referring to an individualasset, such as a piece of equipment, book value refers to theasset’s ______ historical value or original purchase price market value or replacement cost , adjusted for any accumulated depreciation or amortizationexpense. The ________ net gross value, or difference between these two values, is called theasset’s book value.In contrast, when the term refers to the entirecompany, it means the total value of the company’s _______ shareholders’ equity total assets as reported in the firm’s _______ balance sheet income statement .ASHA: That makes sense. So, what makes this value important toinvestors is that it is ________ a historical an expected future value that can change—but only due to a couple of events, includingthe _________ repurchase sale of Treasury stock, the sale of new common or preferred shares, andthe payment of _________ interest dividends . Equally important, it ________    will not will change in response to changes in the market prices of the firm’sshares. RAFAEL: Right! So, how useful would a firm’s book value be forassessing the performance of Water & Power’s management? ASHA: Well, because Water & Power’s book value _________ does not change changes with changes in the market price of the firm’s shares, the firm’sbook value __________ cannot can reflect management’s efforts to maximize the price of the firm’scommon stock and therefore ________ should not should be used to evaluate management’s performance. Now, what about “Market Value Added”? RAFAEL: During the 1990s, the consulting firm Stern, Stewart &Company developed the concept of Market Value Added, or MVA, tobetter assess management’s performance in maximizing theirshareholders’ wealth. To achieve this, a firm’s MVA is computed asthe _________ difference sum between (of) the _________ market book value and the ________    market book value of Water & Power’s shareholders’ equity. OK, now here’s a question for you: Compared to the book value,what is the advantage of the MVA as a means of evaluatingmanagement’s performance? ASHA: Well, I would say that because the market value of Water& Power’s shareholders’ equity is calculated by multiplying theshares’ ________ par value market price by the number of shares _________ outstanding authorized , then it will fluctuate depending on how the market perceivesmanagement’s performance. A positive assessment will result in______    an increased a decreased market price and MVA. RAFAEL: Nicely done! Does this make your reading of Water &Power’s annual report easier?