Asked by Abylay Tastanbekov on Jul 19, 2024
Verified
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.
Economic Value Added
A measure of a company's financial performance based on the residual wealth calculated by subtracting a firm's cost of capital from its operating profit.
Compensation
Payment or benefits provided in exchange for services rendered or as reimbursement for expenses, often related to employment or services provided.
Cost of Capital
The rate of return a company must earn on its investments to maintain its market value and attract funds.
- Evaluate the factors influencing a firm's economic value added (EVA) and its importance in managerial compensation.
Verified Answer
KO
Kezia OctoberJul 25, 2024
Final Answer :
A
Explanation :
A growing number of firms tie managers' compensation to EVA, making it an important metric for evaluating managerial performance. Profitability alone does not guarantee positive EVA, as it also takes the cost of capital into account. Additionally, EVA does recognize that the cost of capital is a real cost and subtracts it from profits. However, the statement regarding positive present value of growth opportunities and EVA is not necessarily true as it depends on the magnitude of the growth opportunities and the cost of capital.
Learning Objectives
- Evaluate the factors influencing a firm's economic value added (EVA) and its importance in managerial compensation.