I-managed company, the economic value related to an asset exceeds its accounting value. Explain.

Question

Question

business finance

Answer 1

Answer #1

A) Economic value is a measure of economic profit of a company.

Formula is

Economic profit= Net profit- Invested capital* Weighted average cost of capital

Where as accounting profit is the traditional performance measurement of a company. It is used in Ratio analysis.

Accounting profit= Revenue- all explicit costs

So economic profit is a true measure of profitability when compared to accounting profit.

A well managed company will show profits more than its cost of capital which is beneficial for investors

So for a well managed company economic value exceeds its accounting value.

Answer 2

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