The correct answer is C. negative economic value added.
Economic value added (EVA) is a measure of a company’s profitability. It is calculated by taking the company’s net operating profit after tax (NOPAT) and subtracting the company’s weighted average cost of capital (WACC). A negative EVA indicates that the company is not generating enough profit to cover its cost of capital. This can be a sign that the company is not investing in profitable projects or that it is not managing its costs effectively.
A negative EVA can also be caused by a decline in the company’s profitability. For example, if the company’s sales decline, its NOPAT will also decline. This can lead to a negative EVA even if the company is still investing in profitable projects.
If a company has a negative EVA, it should take steps to improve its profitability. This may involve investing in more profitable projects, managing its costs more effectively, or raising its prices. If the company is unable to improve its profitability, it may need to consider selling off assets or going out of business.
Here is a brief explanation of each option:
- Option A: Zero economic value added. This would mean that the company is generating just enough profit to cover its cost of capital. This is not a good situation, as it means that the company is not creating any value for its shareholders.
- Option B: Percent economic value added. This is not a valid option. EVA is a dollar value, not a percentage.
- Option C: Negative economic value added. This is the correct answer. As explained above, a negative EVA indicates that the company is not generating enough profit to cover its cost of capital.
- Option D: Positive economic value added. This is the best-case scenario. It indicates that the company is generating more profit than its cost of capital. This is creating value for shareholders.