question archive Which of the following statements is most correct about Economic Value Added (EVA)? A
Which of the following statements is most correct about Economic Value Added (EVA)? A
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Which of the following statements is most correct about Economic Value Added (EVA)?
A. If a company has no debt, its EVA equals its net income.
B. If a company has positive ROE, its EVA must also be positive.
C. A company's EVA will be positive whenever the cost of equity exceeds the ROE.
D. All of the statements above are correct.
E. None of the statements above is correct.
Which of the following statements is most correct about Economic Value Added (EVA)?
A. If a company has no debt, its EVA equals its net income.
B. If a company has positive ROE, its EVA must also be positive.
C. A company's EVA will be positive whenever the cost of equity exceeds the ROE.
D. All of the statements above are correct.
E. None of the statements above is correct.
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ANSWER: E
EVA is the value added after both shareholders and debtholders have been paid. Net income only takes payments to debtholders into account, not shareholders. Therefore, statement a is false. EVA = (ROE - r) ? Total equity. So, if r is larger than ROE, EVA would be negative even if ROE is positive. The shareholders are getting a return but not as much as they require.
Therefore, statement b is false.
Statement c is exactly opposite of what is true, so it is false. EVA will be negative whenever the cost of equity exceeds the ROE.
Since statements a, b, and c are false, the correct choice is statement e.
