Which of the following statements concerning Economic Value Added (EVA)is MOST correct?
A) The higher the cost of capital, the higher the EVA, other things being held constant.
B) EVA can be negative even if operating profits are positive.
C) A company with positive net income will have positive EVA.
D) Higher operating return on assets will result in lower EVA for a company with a debt ratio over 50%.

Question

Quizplus · Accepted Answer

EVA can be negative even if operating profits are positive because it takes into account the cost of capital and the opportunity cost of investing in a particular project or business. A company can have positive net income but if it is not generating enough returns to cover the cost of capital, then the EVA will be negative. Option A is incorrect because a higher cost of capital will result in a lower EVA, not a higher one. Option C is incorrect because positive net income does not necessarily mean positive EVA. Option D is incorrect because a higher operating return on assets will generally result in a higher EVA, regardless of the debt ratio.

Which of the Following Statements Concerning Economic Value Added (EVA)is