MCQs on Economic Value Added

 EVA stands for:

a) Earnings Versus Assets

b) Economic Value Added

c) Effective Value Assessment

d) EBITDA Value Analysis

Answer: b) Economic Value Added

 

Economic Value Added is calculated as:

a) Net Income - Cost of Goods Sold

b) Operating Profit - Taxes

c) Net Operating Profit After Taxes (NOPAT) - Cost of Capital

d) Gross Profit - Interest Expense

Answer: c) Net Operating Profit After Taxes (NOPAT) - Cost of Capital

 

Which of the following is an advantage of using Economic Value Added as a performance metric?

a) It focuses on short-term profits and ignores long-term value creation.

b) It encourages managers to make decisions that benefit shareholders.

c) It only considers accounting profits, providing an accurate picture of a company's financial health.

d) It is easy to manipulate and inflate through accounting techniques.

Answer: b) It encourages managers to make decisions that benefit shareholders.

 

Economic Value Added aligns the interests of:

a) Managers and customers

b) Shareholders and competitors

c) Shareholders and management

d) Employees and suppliers

Answer: c) Shareholders and management

 

EVA analysis is particularly effective for comparing the performance of companies:

a) Within the same industry

b) In different industries with varying levels of capital intensity

c) Operating in the same country

d) With similar total revenues

Answer: b) In different industries with varying levels of capital intensity

 

How does Economic Value Added contribute to a company's strategic planning?

a) By emphasizing short-term financial goals

b) By focusing on minimizing operational costs

c) By aligning decisions with long-term value creation

d) By promoting excessive risk-taking

Answer: c) By aligning decisions with long-term value creation

 

One of the limitations of Economic Value Added is its failure to consider:

a) Taxes and interest expenses

b) Non-operating income

c) Cost of capital

d) Non-cash expenses

Answer: d) Non-cash expenses

 

EVA may not be suitable for evaluating the performance of companies operating in industries with significant investments in:

a) Research and Development (R&D)

b) Marketing and Advertising

c) Raw materials

d) Employee salaries

Answer: a) Research and Development (R&D)

 

Which of the following is NOT a limitation of using Economic Value Added?

a) Focuses on short-term results

b) Ignores the time value of money

c) Relies heavily on accounting data

d) Does not consider the cost of equity capital

Answer: d) Does not consider the cost of equity capital