If ROC is less than a firm's cost of capital,which of the following must be true?
A) The firm's EVA is positive.
B) The firm's EVA is negative.
C) The firm's ROE is equal to zero.
D) The firm's ROE is negative.

Question

Quizplus · Accepted Answer

The ROC should be greater than the cost of capital for a firm to generate positive economic profits, which is measured by EVA. Therefore, if the ROC is less than the cost of capital, the firm's EVA would be negative. ROE is a measure of profitability, but it does not take into account the cost of capital, so it does not provide sufficient information to determine the impact of a lower ROC. Therefore, choices A, C, and D are not necessarily true.

If ROC Is Less Than a Firm's Cost of Capital,which