Question 1

The following are advantages of using EVA as a measure of performance except:
A) EVA is a substitute for explicit monitoring by top management
B) EVA makes the cost of capital visible to the operating management hence reduce capital employed
C) EVA does not measure present value
D) EVA highlights the parts of business that are not performing

Accepted Answer

The answer of The following are advantages of using EVA...

Question 2

Calculate the economic depreciation in years 1, 2 and 3.
A) 7, 7, 7
B) 9, 7, 5
C) 10, 7, 3
D) None of the above

Accepted Answer

The answer of Calculate the economic depreciation in years 1,...

Question 3

The following firms have negative EVAs except:
A) Time Warner
B) Pfizer
C) IBM
D) Coca-Cola

Accepted Answer

Coca-Cola is known for having a strong brand and consistent profitability, which typically results in a positive Economic Value Added (EVA).

Question 4

Calculate the economic income in years 1, 2 and 3.
A) 2.1, 1.4, 0.7
B) 7, 7, 7
C) 1.0, 7.1, 3.7
D) None of the above

Accepted Answer

Economic income is equal to accounting income plus depreciation. In this case, depreciation is $1 per year. Therefore, economic income is $2.1 in year 1, $1.4 in year 2, and $0.7 in year 3.

Question 5

Generally, firms with high levels of intangible assets tend to report (with other things being the same):
A) Lower than actual ROI
B) Higher than actual ROI
C) Same as the actual ROI
D) None of the above

Accepted Answer

Firms with high levels of intangible assets tend to report higher than actual ROI. This is because intangible assets are not always reflected in the financial statements and may not be accurately valued. As a result, a firm's ROI may appear higher as a result of the undervaluation of intangible assets.

Question 6

Economic rate of return is defined as:
A) [(C1 + PV1 - PV0 )]/(PV0)
B) [(C1 - (PV1 - PV0 )]/(PV0)
C) [(C1 + PV1)]/(PV0)
D) None of the above

Accepted Answer

Economic rate of return is calculated by dividing the net present value of future cash inflows by the initial investment. Therefore, option A is the correct formula for calculating the economic rate of return. Option B subtracts the initial investment twice, leading to an incorrect result. Option C does not consider the initial investment, also resulting in an incorrect formula.

Question 7

Economic profit (EP) is calculated as follows:
A) EP = (ROI - r) * (capital invested) where r = cost of capital
B) EP = (ROI + r) * (capital invested) where r = cost of capital
C) EP = (ROI) * (capital invested)
D) none of the above

Accepted Answer

Economic profit takes into account both the return on investment (ROI) and the cost of capital, as represented by the "r" variable in the formula. This allows for a more accurate assessment of profitability, as it considers the opportunity cost of investing capital in the first place. Option B incorrectly assumes that the cost of capital should be added to ROI when calculating economic profit. Option C does not account for the cost of capital and therefore may overstate profitability. Option D is not a valid response.

Question 8

The following are disadvantages of using EVA as a measure of performance except:
A) EVA does not measure present value
B) EVA rewards taking project with quick paybacks and penalizes taking projects with longer payback periods
C) EVA reduces explicit monitoring by top management
D) EVA is difficult to apply for start up ventures

Accepted Answer

EVA actually increases the need for explicit monitoring by top management as it requires careful tracking of cost of capital and investment decisions. Options A, B, and D are all valid disadvantages of using EVA as a measure of performance.

Question 9

Economic Value Added (EVA) is calculated as follows:
A) EVA = Income Earned - (cost of debt) * (investment)
B) EVA = Income Earned - (cost of equity) * (investment)
C) EVA = Income Earned - (cost of capital) * (investment)
D) none of the above

Accepted Answer

EVA is the measure of a company's economic profit or value created for shareholders. It is calculated by subtracting the cost of capital from the company's net operating profit after tax. Therefore, the correct formula for calculating EVA is EVA = Income Earned - (cost of capital) * (investment). Option C provides the accurate formula for calculating EVA.

Question 10

If the cost of capital is 15%, what is the net return on the investment?
A) 5%
B) 20%
C) 15%
D) None of the above

Accepted Answer

The answer of If the cost of capital is 15%,...

Question 11

According to the survey of senior managers by Graham, Harvey and Rajgopal, the senior managers admitted to the following:
I. adjusting their firms' operations and investments in order to manage earnings.
II. they were willing to decrease discretionary spending in R&D, advertising or maintenance if necessary to meet earnings target.
III. many of them would, if necessary, also defer or reject investment projects with positive
NPVs.
A) I only
B) II only
C) I and II only
D) I, II, and III

Accepted Answer

The survey of senior managers conducted by Graham, Harvey and Rajgopal revealed that the senior managers admitted to all three statements - adjusting their firms' operations and investments in order to manage earnings, being willing to decrease discretionary spending in R&D, advertising or maintenance if necessary to meet earnings target, and deferring or rejecting investment projects with positive NPVs if necessary. Hence, the best choice is D - I, II, and III.

Question 12

The plant manager can improve EVA by:
I. increasing earnings
II. increasing capital employed
III. reducing earnings
IV. reducing capital employed
A) I and II only
B) II and III only
C) III and IV only
D) I and IV only

Accepted Answer

The plant manager can improve EVA by either increasing earnings or reducing capital employed. Therefore, options I and IV are the only ones that will improve EVA. Option II would increase the capital employed and lower EVA unless the increase in earnings offsets the increase in capital employed. Option III would reduce earnings and further reduce EVA.

Question 13

A firm has an average investment of 100,000 during the year. During the same period, the firm has an after-tax income of $16,000. If the cost of capital is 15%, what is the economic profit?
A) +16,000
B) +15,000
C) +1,000
D) None of the above

Accepted Answer

Economic profit is calculated as after-tax income minus the opportunity cost of capital. The opportunity cost of capital is the return the firm could have earned if it had invested the money elsewhere. In this case, the cost of capital is 15%, so the opportunity cost of investing the $100,000 is $15,000. Therefore, the economic profit is $16,000 - $15,000 = $1,000.

Question 14

Calculate the economic value added (EVA) for the firm. (Cost of capital is 15%)
A) -$500
B) $1500
C) $1200
D) None of the above

Accepted Answer

The answer of Calculate the economic value added (EVA) for...

Question 15

The term Economic Value Added (EVA) is copyrighted by:
A) Brealey-Myers
B) Brealey-Myers-Allen
C) Ross-Westerfield
D) Stern-Stewart

Accepted Answer

Stern-Stewart is the creator and owner of the term Economic Value Added (EVA).

Question 16

The following firms have positive EVAs except:
A) Microsoft
B) Pfizer
C) Wal-Mart Stores
D) Intel Corp.

Accepted Answer

The answer of The following firms have positive EVAs except:
A)...

Question 17

If the cost of capital is 15%, what is the net return on the investment?
A) 15%
B) -5%
C) 10%
D) None of the above

Accepted Answer

The answer of If the cost of capital is 15%,...

Question 18

Calculate the economic value added (EVA) for the firm. (Cost of capital is 15%)
A) $500
B) $1,500
C) $2,000
D) None of the above

Accepted Answer

The answer of Calculate the economic value added (EVA) for...

Question 19

EVA is used for:
I. Measuring performance within the firm II) Rewarding performance within the firm
III. Improving performance within the firm
A) I only
B) II only
C) I and II only
D) I, II, and III

Accepted Answer

EVA (Economic Value Added) is used for measuring performance within the firm, rewarding performance within the firm, and improving performance within the firm. It is a financial performance measure that calculates the amount of value created by a company above the cost of capital used to generate that value. By using EVA, a firm can identify areas where its performance is not meeting the expectations, and take steps to improve it. EVA also helps in rewarding employees, as it measures their contribution to the firm's value creation, rather than just their revenue generation.

Question 20

Calculate the economic rate of return in years 1, 2 and 3.
A) 43.3%, 43.3%, 65%
B) 10%, 10%, 10%
C) 43.3%, 40%, 36.7%
D) None of the above

Accepted Answer

The answer of Calculate the economic rate of return in...

Quiz 12: Agency Problems, Compensation, and Performance Measurement

The following are advantages of using EVA as a measure of performance except:

Calculate the economic depreciation in years 1, 2 and 3.

The following firms have negative EVAs except:

Calculate the economic income in years 1, 2 and 3.

Generally, firms with high levels of intangible assets tend to report (with other things being the same) :

Economic rate of return is defined as:

Economic profit (EP) is calculated as follows:

The following are disadvantages of using EVA as a measure of performance except:

Economic Value Added (EVA) is calculated as follows:

If the cost of capital is 15%, what is the net return on the investment?

The plant manager can improve EVA by: I. increasing earnings II. increasing capital employed III. reducing earnings IV. reducing capital employed

A firm has an average investment of 100,000 during the year. During the same period, the firm has an after-tax income of $16,000. If the cost of capital is 15%, what is the economic profit?

Calculate the economic value added (EVA) for the firm. (Cost of capital is 15%)

The term Economic Value Added (EVA) is copyrighted by:

The following firms have positive EVAs except:

If the cost of capital is 15%, what is the net return on the investment?

Calculate the economic value added (EVA) for the firm. (Cost of capital is 15%)

EVA is used for: I. Measuring performance within the firm II) Rewarding performance within the firm III. Improving performance within the firm

Calculate the economic rate of return in years 1, 2 and 3.