If the purpose of an entity is to maximise the wealth of its owners,then the performance measure that will ensure managers make decisions in the best interest of the owners is:
A) profit margin.
B) return on investment.
C) residual income.
D) economic value added.

Question

Quizplus · Accepted Answer

Economic value added (EVA) measures the amount of value created by a company after deducting the cost of capital, which is the minimum rate of return required by the investors. EVA reflects the amount by which profits exceed the cost of capital, and it is a better performance measure than profit margin, return on investment (ROI), and residual income because it encourages managers to think about the cost of capital and to focus on long-term value creation for the owners.

If the Purpose of an Entity Is to Maximise the Wealth