Assignment Strategic Management Essay.
Do firms with the following financial results have below normal, normal, or above normal economic performance? If ROA > WACC: * Company creates value for shareholders * Company generates a positive NPV (Net Present Value) * Company generates a positive EVA (Economic Value Added) (a) ROA = 14. 3%, WACC = 12. 8% Above normal economic performance (b) ROA = 4. 3%, WACC = 6. 7% Below normal economic performance (c) ROA = 6. 5%, WACC = 9. 2% Below normal economic performance (d) ROA = 8. 3%, WACC = 8. 3% Normal economic performance . Is it possible for a firm to simultaneously earn above normal economic returns and below average accounting returns? How about below normal economic returns and above average accounting returns? Why or why not? If this can occur, which measure of performance is more reliable; economic performance or accounting performance? Why? The correlation between economic returns and accounting returns is one-to-one.
That means a company that performs well using one of these measures usually perfrm well using the other.
However, it is possible for a company to have above normal economic returns and below average accounting returns.
This could happen when a firm has a very low cost of capital and is earning at a rate in excess of this cost, but still below the industry average. Is also possible for a company to have below normal economic returns and above average accounting returns. This could happen when a firm is not earning its cost of capital but has above industry average accounting performance. 1,3,5 chapter 2 1, 2