Economic

Value

Added)

K. Johnson, Inc.'s managers want to evaluate the firm's prior-year performance in terms of its contribution to shareholder value. This past year, the firm earned an operating income return on investment of

13

percent, compared to an industry norm of

12

percent. It has been estimated that the firm's investors have an opportunity cost on their funds of

16

percent, which is the same as the firm's overall cost of capital. The firm's total assets for the year were

$ 250

million. Compute the amount of economic value created or destroyed by the firm. How does your finding support or fail to support what you would conclude using ratio analysis to evaluate the firm's performance? Assume that the firm has no debt.

What is the amount of economic value created or destroyed by the firm? Enter a positive number for EVA created or a negative number for EVA destroyed.

$nothing

million(Round to one decimal place.)

Does your finding support what you would conclude using ratio analysis to evaluate the firm's performance?(Select the best choice below.)

A.

Yes. A firm that outperforms the average firm in the industry tends to have a lower or even a negative amount of EVA.

B.

No. The EVA measures only the shareholder's wealth and thus can not be used to evaluate the firm's performance in ratio analysis.

C.

Yes. The amount of economic value created or destroyed by the firm is not related to the firm's performance when compared to industry norms.

D.

No. The loss of shareholder value occurs in spite of the fact that the firm is earning a return on its investments above the average firm in the industry.