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Answer to Question #12150 in Other Management for John

Question #12150
Which of the following statements is CORRECT?
Answer 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.
MVA gives us an idea about how much value a firm’s management has added during the last year.
MVA stands for market value added, and it is defined as follows:
MVA = (Shares outstanding)(Stock price) + Book value of common equity.
EVA stands for economic value added, and it is defined as follows:
EVA = EBIT(1-T) – (Investor-supplied op. capital) x (A-T cost of capital).
EVA gives us an idea about how much value a firm’s management has added over the firm’s life.

Expert's answer
EVA gives us an idea about how much value a firm’s management has added over the firm’s life.
In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co and of EVA Dimensions LLC, is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors (being shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm's capital. The idea is that value is created when the return on the firm's economic capital employed is greater than the cost of that capital; see Corporate finance: working capital management. This amount can be determined by making adjustments to GAAP accounting. There are potentially over 160 adjustments that could be made but in practice only five or seven key ones are made, depending on the company and the industry it competes in.

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