Chartered Financial Analyst (CFA) Practice Exam Level 2

What does Economic Value Added (EVA) measure?

1. Operational efficiency in asset management

2. Company's ability to generate value beyond the cost of capital

3. Revenue growth relative to industry standards

4. Market share in comparison to competitors

The correct answer is: Company's ability to generate value beyond the cost of capital

Economic Value Added (EVA) is a measure of a company's financial performance that reflects the true economic profit of a company. Specifically, it quantifies the value a company generates from its net operating profit after tax (NOPAT) in excess of the cost of the capital it employs. This concept is rooted in the notion that for a company to create value for its shareholders, it must earn more than its cost of capital. By focusing on the difference between the return generated and the cost of capital, EVA provides insight into how well a company is managing its resources and whether it is effectively growing its operations and profitability beyond what is required to satisfy its investors. This makes it a crucial metric for understanding the economic value that a company is generating over time. The other choices could measure various aspects of a company's performance but do not reflect the specific focus of EVA. Operational efficiency, revenue growth, and market share might play vital roles in a company's overall performance but do not capture the concept of generating surplus value over capital costs as EVA does. This unique perspective allows stakeholders to gauge whether the company is truly adding value, thus emphasizing why choice B is the correct answer.