JOSH: That makes sense. So$,$ what makes this value important to investors is that it isvalue that can change$-$butonly due to a couple of events, including theof Treasury stock, the sale of new common or preferred shares, and thepayment of Equally important, itchange in response to changes in the market prices of the firm's shares.MIA: Right! So$,$ how useful would a firm's book value be for assessing the performance of Western G&E$\text{'}$s management?JOSH: Well, because Western G&Es book value $\_$valuemanagement's performance.with changes in the market price of the firm's shares, the firm's bookreflect management's efforts to maximize the shareholder wealth and thereforebe used to evaluateNow, what about "Economic Value Added"?MIA: During the $1990$s$,$ the consulting firm Stern, Stewart & Company developed the concept of Economic Value Added, or EVA, to better assessmanagement's performance in maximizing their shareholders' wealth.Western G&E$\text{'}$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 Western G&Esfrom itsIn turn, Western G&E$\text{'}$s annual cost of capital is calculated by multiplying its total net fixed assets and net operating working capital, by the after$-$tax percentage cost of capital.operating capital, which includes itsOK, 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 Western G&E$\text{'}$s management?JOSH: Give me a second to think... OK$,$ it's better to evaluate the performance of Western G&E$\text{'}$s management by using the company's EVArather than the book value of its shareholders' equity because the better the managerial decisions being made, thethe after$-$taxnet operating income earned, thethe difference between this net operating income and the cost of capital needed to generatethat income, and thethe EVA, or true economic profit, earned by the company.MIA: Nicely done! Does this make your reading of Western G&E$\text{'}$s annual report easier?