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CA Final · Advanced Financial Management · Business Valuation

Which statement about EVA is correct under the standard ICAI treatment?

EVA is positive when NOPAT exceeds the capital charge covering all capital, including the cost of equity. Accounting profit after interest does not charge for equity, so a firm can report profit yet destroy value when EVA is negative.

  1. AEVA is positive only when accounting profit after interest exceeds zero
  2. BEVA is positive when NOPAT exceeds the charge for all capital, including the cost of equityCorrect
  3. CEVA ignores the cost of equity capital
  4. DEVA is computed by deducting only interest from PBIT

Explanation

EVA = NOPAT minus WACC x capital employed, so it charges for equity as well as debt. A firm with positive accounting profit can still have negative EVA if profit does not cover the cost of equity, which is why the first option is wrong.

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