How does EVA encourage the right kind of behaviour from divisions?
A)through its emphasis on after-tax net income
B)through its emphasis on total capital employed
C)through its emphasis on true cost of capital
D)through its emphasis on before-tax operating income

Question

Quizplus · Accepted Answer

EVA encourages the right kind of behavior from divisions by emphasizing the true cost of capital. By considering the cost of equity and debt, EVA can provide a more accurate measure of a division's profitability and encourage managers to make decisions that will generate superior returns for shareholders. EVA differs from other financial measures, such as after-tax net income or before-tax operating income, because it accounts for the cost of capital and measures a division's ability to create value for shareholders. Total capital employed is also important for calculating EVA, but it is not the primary emphasis of the metric.

How Does EVA Encourage the Right Kind of Behaviour from Divisions