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In the EVA framework set out in the lesson, the "capital charge" is described as a specific product. What is the capital charge in the EVA formula?
Answer & Solution
Correct answer: B.
1. EVA decomposes into two components: NOPAT and the capital charge.
2. The capital charge is the cost of capital times the amount of capital tied up in the investment.
3. It is the cash flow required to compensate investors for the riskiness given the amount of capital invested.
4. The other products invert tax, dividend or macro variables — not the EVA capital charge.
_Source: ICSI CS Executive Paper 8 (Financial and Strategic Management) — Lesson 1: Nature, Significance and Scope of Financial Management, pp. 6-20._
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