Question

Which of the following statements is CORRECT?

1) 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.
2) MVA gives us an idea about how much value a firm's management has added during the last year.
3) EVA gives us an idea about how much value a firm's management has added over the firm's life.
4) EVA stands for economic value added, and it is defined as follows: EVA = NOPAT - (Total invested capital)(AT cost of capital)

Answer 1

The primary difference between EVA and accounting net income is that EVA represents net income before deducting the cost of equity capital the firm uses. EVA measures the value a firm's management has added based on its ability to generate higher returns for its investors, while MVA measures the difference between the firm's market value and the total capital invested in the firm.

Step-by-step explanation:

The correct statement among the given options is 1) 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.

EVA, which stands for economic value added, is a measure of financial performance that calculates the value a firm's management has added based on its ability to generate higher returns for its investors. It takes into account the cost of equity capital, which is the return shareholders expect to earn on their investment.

MVA, on the other hand, stands for market value added and measures the difference between the firm's market value and the total capital invested in the firm. It provides insight into how much value a firm's management has created over the firm's life.