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ACCA Strategic Professional · Advanced Performance Management · Strategic management accounting

A company reports a rising earnings per share for five years, yet its market value added (MVA) has fallen over the same period. Which interpretation is most consistent with these facts?

The most consistent interpretation is that investors expect returns on invested capital to be below the cost of capital. EPS ignores the capital charge, whereas MVA reflects expected future economic profit, so earnings growth may be failing to create real shareholder value.

  1. AInvestors expect returns on invested capital to be below the cost of capital, so reported earnings growth is not creating valueCorrect
  2. BThe company has reduced its gearing, so its MVA must automatically fall
  3. CEPS growth proves that economic profit is also rising
  4. DMVA falls only when dividends are increased

Explanation

MVA is market value of the firm less capital invested, reflecting expectations of future economic profit. Falling MVA alongside rising EPS suggests growth is being achieved with returns below the cost of capital or with higher risk. EPS ignores the capital charge, so it does not prove economic profit is rising.

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