Devon Inc. has a higher ROE than Berwyn Inc. (17 percent compared to 14 percent), but it has a lower EVA than Berwyn. Which of the following factors could explain the relative performance of these two companies?

Question

Quizplus · Accepted Answer

A higher ROE simply means that Devon is generating more profit relative to its shareholders' equity compared to Berwyn. However, EVA takes into account the cost of capital and measures the value that a company creates for its investors. A lower EVA indicates that Devon is not creating as much value for its investors as Berwyn. A possible explanation for this could be that Devon is riskier, has a higher WACC (weighted average cost of capital), and a higher cost of equity, which reduces its profitability despite generating a higher ROE. Option A is incorrect as the size of the company does not explain the difference in performance. Option C is also incorrect as a higher EBIT does not necessarily translate to a higher EVA. Option D is incorrect as only option B provides a likely explanation. Option E is incorrect as option A and C are incorrect.

Devon Inc Has a Higher ROE Than Berwyn Inc