Which of the following strategies may increase economic value added?
A) Increase profit as a percentage of capital employed.
B) Borrow additional funds and invest in assets that earn more than the weighted average cost of capital.
C) Sell off assets that earn more than the weighted average cost of capital.
D) Increase profit as a percentage of capital employed AND borrow additional funds and invest in assets that earn more than the weighted average cost of capital.

Question

Quizplus · Accepted Answer

Increasing profit as a percentage of capital employed and borrowing additional funds to invest in assets that earn more than the weighted average cost of capital both contribute to increasing economic value added. By increasing profit margins, the company is able to generate more profits from the same amount of invested capital, increasing its economic value added. By investing in assets that earn more than the cost of capital, the company is generating excess returns, further increasing its economic value added. Selling off assets that earn more than the weighted average cost of capital may generate a short-term boost to economic value added, but over the long run it may lead to a decrease in overall profitability if those assets were essential to the company's operations.

Which of the Following Strategies May Increase Economic Value Added