Which of the following statements is true concerning Economic Value Added?
A) A growing number of firms tie managers' compensation to EVA.
B) A profitable firm will always have a positive EVA.
C) EVA recognizes that the cost of capital is not a real cost.
D) If a firm has positive present value of growth opportunities it will have positive EVA.

Question

Quizplus · Accepted Answer

Many firms have implemented EVA as a performance metric and have tied managers' compensation to EVA. This incentivizes managers to increase the company's profitability while keeping the cost of capital in mind.

B is not necessarily true as a profitable firm may have a negative EVA if its cost of capital is high.

C is not true. EVA recognizes that the cost of capital is a real cost and deducts it from the net operating profit after tax (NOPAT) to calculate the value generated by the company.

D is not necessarily true. Positive present value of growth opportunities may indicate that a firm is investing in future growth, but if the cost of those opportunities exceeds the returns, the EVA may be negative.

Which of the Following Statements Is True Concerning Economic Value