Use the information

below to answer question 35 and 36.

Thabiso is an equity analyst

responsible for producing financial reports to use as tools to attract new

clients. He is analysing Kgosi Textiles Ltd, where, along with a dividend

discount model approach, he would like to measure the contribution that the

managers of Kgosi have made to the company’s apparent ongoing success.

He considers using NOPAT and EVA

to assess management performance. He believes that increasing invested capital

to pursue projects with positive net present values will lead to growth in both

NOPAT and EVA.

However, Thabiso decides

to use the residual income model instead. He provides the following

justification for his choice:

•  

  The calculation of residual income depends primarily on readily

  available accounting data.

• The residual income model can be used even when cash flow is difficult

  to forecast.

• The residual income model does not depend on dividend payments or on

  positive free cash flows in the near future.

• The residual income model depends on the validity of the clean surplus

  relation.

Is Thabiso correct

in

believing that increasing invested capital to pursue projects with positive net

present values will lead to higher NOPAT and EVA?