EVA PROBLEMS
Q.1) Pizza
Hut Ltd. has existing assets in which it has capital invested of Rs.150 crores. The After Tax
Operating Income is Rs.20 crores & Company has a Cost of Capital of 12%. Estimate the
Economic Value Added (EVA) of the firm.
Q.1 Solution:- Capital Employed = 150 crores
NOPAT = 20 crores
WACC = 12%
EVA
= NOPAT – (WACC x CE)
= 20 – (12% x 150)
= 2 crores.
Q.2) The Income Statement and Balance Sheet of Alpha Company Ltd. is given below:
INCOME STATEMENT
Rs.
Rs.
Particulars
(in Lakhs)
(in Lakhs)
Sales
5,000
Interest on investments
100
Profit on sale on old assets
50
Total Income
5,150
Less:
Manufacturing cost
1,800
Administration cost
600
Selling and distribution cost
500
Depreciation
300
Loss on sale of an old Building
50
3,250
EBIT
1,900
Less: Interest
200
EBT
1,700
Less: Tax (30%)
510
PAT
1,190
EPS [1, 190 Lakhs/ 50 Lakhs]
Rs. 23.8
P/E ratio
2.5
BALANCE SHEET
LIABILITIES
Equity Capital (Rs. 10 share)
Retained profits
Term loan
Payables
Provisions
TOTAL
Rs.
500
400
600
150
130
1,780
ASSETS
Buildings
Machinery
Stock
Debtors
Bank
TOTAL
Rs.
800
700
100
120
60
1,780
The cost of equity and cost of debt is 14% and 8% respectively. The company pays 30%
corporate tax.
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From the information given you are required to calculate the EVA. Also, calculate MVA on
the basis of Market value of equity capital.
Q.2 Solution)
EVA =
=
=
Calculation of NOPAT
Sales
(-) Operating Expenses
(-) Depreciation
EBIT
(-) Tax @ 30%
NOPAT
1
2
3
NOPAT – (WACC x CE)
1260 – (10.64% X 1500)
1100.4
5000
2900
300
1800
540
1260
Calculation of WACC
Sources
Amt.
Equity Cap.
500
Retained
400
Term Loan
600
1500
Proportion
33.33
26.67
40.00
100.00
Cost
14%
14%
5.6%
WACC
4.67%
3.73%
2.24%
10.64%
kd = I (1 – tax)
= 8 (1 – 0.3)
= 5.6
MVA = Market Capitalisation – Book value of Net Worth
= 2975 – 900
= 2075
Market Capitalisation
P/E Ratio =
2.5
=
 MPS
 MPS
=
=
=
=
=
MPS x No. of Shares
59.2 x 50
2975
MPS
EPS
MPS
23.8
2.5 x 23.8
59.2
Q.3) Navigator Ltd. is considering a capital project for which the foll. information is available.
Investment Outlay
10,000 Depreciation
Straight line
Project Life
5 years Tax rate
40%
Salvage Value
0 Debt Equity ratio
3:2
Annual Revenues
8,000 Cost of equity
20%
Annual costs (excluding
4,000
Cost of debt (post tax)
8%
depreciation, interest & taxes)
Calculate EVA of the project over its life.
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Q.3 Solution) EVA
=
=
=
Calculation of NOPAT
Sales
(-) Operating Expenses
(-) Depreciation
EBIT
(-) Tax @ 40%
EBT / NOPAT
Depreciation
=
=
=
Calculation of WACC
D

E
D
=
=
Sources
Debt
Equity
NOPAT – (WACC x CE)
1200 – (12.8% x 10,000)
- 80
8,000
4,000
2,000
2,000
800
1,200
Total Cost - Scrap
Estimated Life
10,000
5
2,000
3
2
3
x 10,000,
5
6,000
,
Amt.
6,000
4,000
10,000
E
Proportion
60%
40%
100%

Cost
8%
20%
2
x 10,000
5
4,000
WACC
4.8
8
12.8
Q.4) For B Ltd. Market rate of return (Rm) = 15%, Interest Rate of Treasury Bonds(Rf)=6.5%, Beta
Factor(β)=1.20 . Calculate Equity Risk Premium & Cost of Equity (ke).
Q.4 Solution) R
Rm

=
=
=
Equity Risk Premium
Cost of Equity
Q.5)
TYBMS
6.5%
15%
1.20
=
=
=
=
=
=
Rm – R
15 – 6.5
8.5%
R +  (Rm – R)
6.5 + 1.20 (8.5)
16.7
The following information is available of Docomo Ltd. Calculate EVA.
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12% Debt Capital
Equity Capital
Reserves & Surplus
Capital Employed
Risk free rate
Beta factor
Market rate of return
Operating profit after tax
Tax rate
Rs. 2,000 crores
Rs. 500 crores
Rs. 7,500 crores
Rs. 10,000 crores
9%
1.05
19%
2,100 crores
30%
Q.5 Solution) EVA = NOPAT – (WACC x CE)
= 2,100 – (17.29 x 10,000)
= 371
Calculation of WACC
Sources
Amt.
Debt
2,000
Equity
500
R&S
7,500
10,000
Proportion
20%
5%
75%
100%
Cost of Debt (kd)
=
=
=
I (1 – tax)
12 (1 – 0.3)
8.4%
Cost of Equity (ke)
=
=
=
=
R +  (Rm – R)
9 + 1.05 (19 – 9)
9 + 1.05 x 10
19.5%
Q.6)
Cost
8.4%
19.5%
19.5%
Compute EVA of BPCL Ltd. for 3 years from the information given – (in Rs. Lakhs)
Year
Average Capital Employed
Operating Profit before Interest
Corporate Income Taxes
Average Debt / Total Capital Employed (in%)
Beta variant
Risk Free Rate (%)
Equity Risk Premium (%)
Cost of Debt (Post Tax) (%)
TYBMS
WACC
1.68
0.98
14.63
17.29
4
1
3,000.00
850.00
80.00
40.00
1.10
12.50
10.00
19.00
2
3,500.00
1,250.00
70.00
35.00
1.20
12.50
10.00
19.00
3
4,000.00
1,600.00
120.00
13.00
1.30
12.50
10.00
20.00
SSF
Q.6 Solution)
Particulars
EVA = NOPAT – (WACC x
CE)
(i) Calculation of NOPAT
EBIT
– Tax
NOPAT
(ii) Calculation of WACC
WACC for debt
Proportion
Cost
(A)
WACC for Equity
Proportion
Cost
(B)
(A + B) Total WACC
(iii) CE (Capital Employed)
Y1
= 770 – (3,000 x 21.7%)
= Rs.119
Y2
= 1180 – (3,500 x 22.58%)
= Rs.389.7
Y3
= 1480 – (400 x 24.79%)
= Rs.488.4
850
80
770
1,250
70
1,180
1,600
120
1,480
40
19%
7.6%
35
19%
6.65
13
20%
2.6
60
23.5%
14.1%
21.7%
3,000
65
24.5%
15.93
22.58
3,500
87
25.5%
22.19
24.79
4,000
ke (Y1)
=
=
=
=
R +  (Rm – R)
12.5 + 1.0 (10)
12.5 + 11
23.5
ke (½)
=
=
=
=
R +  (Rm – R)
12.50 + 1.20 (10)
12.50 + 12
24.5
ke (1/3)
=
=
=
R +  (Rm – R)
12.50 + 1.30 (10)
25.5
Q.7) The capital structure of BHEL Ltd is as under:
 80,00,000 Equity shares of Rs. 10 each = Rs. 800 lakhs
 1,00,000 12% Preference Shares of Rs. 250 each = 250 Lakhs
 1,00,000 10% debentures of Rs. 500 each = 500 Lakhs
 10% term loan from bank = 450 lakhs
The Company’s Profit and Loss Account for the year showed a balance PAT of Rs. 110 Lakhs,
after appropriating Equity Dividend at 20%. The company is in the 40% tax bracket. Treasury
bonds carry 6.5% interest and beta factor for the company may be taken at 1.5. The long run
market rate of return may be taken at 16.5%. Calculate EVA.
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Q.7 Solution) EVA
=
=
=
=
NOPAT – (WACC x Capital employed)
357 – (12.95% x 2000)
357 – 259
98
Calculation of NOPAT
EAT (After dividend)
(+) Equity Dividend @ 20%
(+) Preference Dividend @ 12%
EAT (Before Dividend) 60%
(+) Tax
@ 40%
EBT
100%
(+) Interest:
Debentures
Loan
EBIT
(-) Tax @ 40%
NOPAT
Calculation of WACC
Sources
Amt.
Equity Share
800
12% Pref. Share 250
10% Debenture 500
10% Term Loan 450
2000
110
160
30
300
200
500
50
45
595
238
357
Cost
21.5
12%
6%
6%
Proportion
40%
12.5
25.00
22.5
100.00
WACC
8.6
1.5
1.5
1.35
12.95
kd
=
=
=
I (1 – tax)
10 (1 – 0.4)
6
Ke
=
=
=
R +  (Rm – R)
6.5 + 1.5 (16.5 – 6.5)
21.5
Q.8)
From the following information, compute EVA of TCS Ltd. (Assume 35% tax rate)
 Equity Share Capital= Rs.1,000 Lakhs
 12% Debenture= Rs.500 Lakhs
 Cost of Equity =20%
 Financial Leverage= 1.5 times
Q.8 Solution)
EVA =
=
=
=
TYBMS
NOPAT – (WACC x CE)
117 – (15.93% x 1,500)
117 – 238.95
(121.95)
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NOPAT
=
DFL
1.5
1.5
 1.5 (EBIT – 60)
 1.5 EBIT – 90
 1.5 EBIT – EBIT

EBIT
EBIT =
180
- Tax
63 .
NOPAT
117
EBIT
=
EBT
EBIT
=
EBIT  Interest
EBIT
=
EBT  60
=
EBIT
=
90
=
90
=
180
Calculation of WACC
Sources
Amt.
Equity
1000
12% Debenture 500
Capital Employed 1500
kd
=
=
=
Cost
66.67
33.33
100.00
Proportion
20%
7.8%
WACC
13.33
2.6
15.93
I (1 – tax)
12 (1 – 0.35)
7.8
EXTRA PRACTISE PROBLEMS
Q.9)
From the following information, compute EVA of Infosys Ltd. (Assume 30% tax rate)
 Equity Share Capital= Rs.1,200 Lakhs
 15% Debenture= Rs.800 Lakhs
 Cost of Equity =18%
 Financial Leverage= 2 times
Q.10) Fill in the blanks
The following date pertains to three divisions of Reebok Company ltd. the company’s
required rate of return on invested capital is 8%.
Particulars
Division A
Division B
Division C
Sales Value (Rs.)
2 Crore
Income (Rs.)
8 Lakhs
40 Lakhs
Average Investment (Rs.)
50 Lakhs
Sales Margin (%)
20%
25%
Capital Turnover (Times)
2
ROI (%)
20%
Residual Income (EVA) (Rs.)
2,40,000
Hint: Economic Valued Added (EVA) = Net Income - COC
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Q.11) Fill in the blanks
The following date pertains to three divisions of Adidas Company ltd. the company’s
required rate of return on invested capital is 8%.
Particulars
Division A
Division B
Division C
Sales Value (Rs.)
4 Crore
Income (Rs.)
16 Lakhs
80 Lakhs
Average Investment (Rs.)
100 Lakhs
Sales Margin (%)
20%
25%
Capital Turnover (Times)
2
ROI (%)
20%
Residual Income (EVA)(Rs.)
4,80,000
Q.12) Co. X wishes to take up the following Project:
Investment
: 100
Project Life
: 4 years
Salvage Value
: Nil
Annual Revenues
: 200
Cost of Equity
: 15 percent
taxes)
Equity Financing
: 100
Depreciation
: Straight Line
Tax Rate
: 50 %
Annual Costs
: 135
(excluding depreciation, interest &
Calculate EVA & NPV and give your recommendations for Co. X
Q.13) Dominos & Co. has existing assets in which it has capital invested of Rs.100 crores. The
After Tax Operating Income is Rs.15 crores & Company has a Cost of Capital of 10%.
Estimate the Economic Value Added (EVA) of the firm.
Q.14) The Income Statement and Balance Sheet of Santro Company Ltd. is given below:
Income Statement
Particulars
Rs.(in Lakhs)
Rs. (in Lakhs)
Sales
1,000
Interest on investments
20
Profit on sale on old assets
10
Total Income
1,030
Less:
Manufacturing cost
360
Administration cost
120
Selling and distribution cost
100
Depreciation
60
Loss on sale of an old Plant and
10
650
Machinery
EBIT
380
Less: Interest
40
EBT
340
Less: Tax (30%)
102
PAT
238
EPS [238 Lakhs/ 10 Lakhs]
Rs. 23.8
P/E ratio
3
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Liabilities
Equity Capital (Rs. 10 share)
General Reserves
Debt
Creditors
Provisions
TOTAL
Balance Sheet
Rs.(in lakhs)
Assets
100 Buildings
80 Plant & Machinery
120 Stock
30 Receivable
26 Bank
356 Total
Rs.(in lakhs)
160
140
20
24
12
356
The cost of equity and cost of debt is 12% and 15% respectively. The company pays 30%
corporate tax.
From the information given you are required to calculate the EVA. Also, calculate MVA on
the basis of Market value of equity capital
Q.15) Multiplex Ltd. is considering a capital project for which the foll. information is available.
Investment outlay
5,000 Depreciation
Straight line
Project life
4 years Tax rate
30%
Salvage value
0 Debt Equity ratio
4:5
Annual revenues
6,000 Cost of equity
18%
Annual costs (excluding depreciation,
3,000 Cost of debt (post tax)
9%
interest & taxes)
Calculate EVA of the project over its life
Q.16) The following information is available of Vodafone Ltd. Calculate EVA.
12% Debt Capital
Equity Capital
Reserves & Surplus
Capital Employed
Risk free rate
Beta factor
Market rate of return
Operating profit after tax
Tax rate
Rs. 1,200 lakhs
Rs. 300 lakhs
Rs. 4,500 lakhs
Rs.6,000 lakhs
8%
2
20%
1,260 lakhs
30%
Q.17) Compute EVA of IOCL Ltd. for 3 years from the information given – (in Rs.Lakhs)
Year
1
2
3
Average Capital Employed
1,800.00
2100.00
2400.00
Operating Profit before Interest
510.00
750.00
960.00
Corporate Income Taxes
48.00
42.00
72.00
Average Debt / Total Capital Employed (in%)
60.00
40.00
20.00
Beta Variant
1.50
1.80
2.10
Risk Free Rate (%)
10.50
10.50
10.50
Equity Risk Premium (%)
8.00
8.00
8.00
Cost of Debt (Post Tax) (%)
10.00
10.00
10.00
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Q.18) The capital structure of L & T Ltd is as under:
 56,00,000 Equity shares of Rs. 10 each = Rs. 560 lakhs
 1,75,000 12% Preference Shares of Rs. 100 each = 175 Lakhs
 3,50,000 10% debentures of Rs. 100 each = 350 Lakhs
 10% term loan from bank = 315 lakhs
The Company’s Profit and Loss Account for the year showed a balance PAT of Rs. 77
Lakhs, after appropriating Equity Dividend at 20%. The company is in the 30% tax bracket.
Treasury bonds carry 7.5% interest and beta factor for the company may be taken at 1.8. The
long run market rate of return may be taken at 17.5%. Calculate EVA.
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