CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

Economic profit equals to:

I. EBIT (1 - Tax Rate) - WACC x Total Capital.
II. Net operating after-tax profit - WACC x Total Capital.
III. EBIT (1 - Tax Rate) - Cost of equity x Total Equity.
IV. Net operating after-tax profit - Cost of equity x Total Equity.
Correct Answer: I and II

They are exactly the same.

User Contributed Comments 7

User Comment
HenryQ Be careful economic income and economic profit are different.
kolkata7 I know henry...thanks
mannpareek one more point " Net operating profit = EBIT "
NIKKIZ Are 3 & 4 Residual Income?
NIKKIZ Sorry - answered my own question; RI is Net Income less Equity charge...
olympria Shouldn't Depreciation be added back to EBIT (1 - Tax rate) in the first option ? Net Op. Profit != EBIT ; Net Op. Profit = EBIT + Depreciation ... Therefore, NOPAT != EBIT (1-tax); NOPAT = EBIT (1-tax) + Depreciation.

Otherwise there won't be any difference between Residual Income and Economic Profit
UcheSam Option III is correct on the assumption that the company is all equity financed. Besides that, it is not economic profit.
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