Which of the following statements is CORRECT?
A) Actions that increase reported net income will always increase cash flow.
B) One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.
C) One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.
D) One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital obtained at a higher cost of capital.
E) If a firm reports positive net income, its EVA must also be positive.

Question

Quizplus · Accepted Answer

Option A is incorrect as actions that increase reported net income may not translate into cash flow, for example, the depreciation expense. Option C is incorrect as EVA recognizes that equity capital has an opportunity cost. Option D is incorrect as EVA measures the excess return generated by the firm over its cost of capital, rather than the absolute level of return. Option E is incorrect as a firm can have positive net income but negative EVA if the cost of capital exceeds the return generated. Option B is correct as EVA measures the ability of a firm to generate returns on its investor-supplied capital, and a higher EVA can be achieved by generating the same operating income with less capital.

Which of the Following Statements Is CORRECT