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) × (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 it represents net income before deducting the cost of the equity capital the firm uses. It is calculated using the formula: EVA = EBIT(1 − T) − (Investor-supplied op.capital) × (A − T cost of capital) and gives us an idea about how much value a firm's management has added in a particular period, not over the firm's life. Option A is incorrect as it states that a deduction is made for the cost of common equity when net income is calculated, which is not true. Option B is incorrect as MVA does not give us an idea about how much value a firm's management has added in the last year. Option C is also incorrect as the formula to calculate MVA is incorrect. The correct formula to calculate MVA is MVA = (Shares outstanding)(Stock price) - Book value of common equity.

Which of the Following Statements Is CORRECT