Which of the following statements is CORRECT?
A)MVA stands for market value added, and it is defined as follows:MVA = (Shares outstanding)(Stock price) + Book value of common equity.
B)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.
C)MVA gives us an idea about how much value a firm's management has added during the last year.
D)EVA gives us an idea about how much value a firm's management has added over the firm's life.
E)EVA stands for economic value added, and it is defined as follows:EVA = NOPAT − (Total invested capital)(AT cost of capital %)

Question

Quizplus · Accepted Answer

Option E is correct because it accurately defines EVA (economic value added) as the difference between NOPAT (net operating profit after taxes) and the cost of capital for the total invested capital. Option A is incorrect as it defines MVA (market value added) as the sum of the market value of shares and book value of equity. Option B is incorrect as it incorrectly states that a deduction is made for the cost of equity when calculating net income. Option C is incorrect as it falsely claims that MVA gives us an idea about the value added by management in the last year. Option D is incorrect as it is untrue that EVA measures the value added by management over the entire life of the firm.

Which of the Following Statements Is CORRECT