Which of the following statements is CORRECT?
A)The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.
B)MVA gives us an idea about how much value a firm's management has added during the last year.
C)MVA stands for market value added, and it is defined as follows: MVA = (Shares outstanding)(Stock price) + Book value of common equity.
D)EVA stands for economic value added, and it is defined as follows: EVA = EBIT(1-T) - (Investor-supplied op.capital) x (A-T cost of capital).
E)EVA gives us an idea about how much value a firm's management has added over the firm's life.

Question

Quizplus · Accepted Answer

EVA stands for economic value added and represents net income before deducting the cost of equity capital used by the firm. It is calculated as EBIT(1-T) - (Investor-supplied op.capital) x (A-T cost of capital). A is incorrect because MVA gives us an idea of how much value a firm's management has added over the firm's life, not just the last year. Option A is incorrect because the cost of common equity is not deducted from net income, but from the capital invested by shareholders. Option B is incorrect because MVA is not limited to the last year's performance. Option C is incorrect because the formula for MVA is (Shares outstanding)(Stock price) - Book value of common equity.

Which of the Following Statements Is CORRECT