EVA PROBLEMS

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)

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
Particulars
Sales
Interest on investments
Profit on sale on old assets
Total Income
Less:
Manufacturing cost
Administration cost
Selling and distribution cost
Depreciation
Loss on sale of an old Building
EBIT
Less: Interest
EBT
Less: Tax (30%)
PAT
EPS [1, 190 Lakhs/ 50 Lakhs]
P/E ratio

Rs.
(in Lakhs)
5,000
100
50

Rs.
(in Lakhs)

5,150

1,800
600
500
300
50

3,250
1,900
200
1,700
510
1,190
Rs. 23.8
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 depreciation,
4,000
Cost of debt (post tax)
8%
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interest & taxes)

Calculate EVA of the project over its life.
Q.3 Solution) EVA =
NOPAT (WACC x CE)
=
1200 (12.8% x 10,000)
=
- 80
Calculation of NOPAT
Sales
(-) Operating Expenses
(-) Depreciation
EBIT
(-) Tax @ 40%
EBT / NOPAT

Depreciation

=
=
Calculation of WACC
D

D
Sources
Debt
Equity

=
=

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

,
Proportion
60%
40%
100%

2
x 10,000
5
4,000

Cost
8%
20%

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()=1.20 . Calculate Equity Risk Premium & Cost of Equity (ke).
Q.4 Solution) R
Rm

=
=
=

Equity Risk Premium

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6.5%
15%
1.20
=
=
=

Rm R
15 6.5
8.5%
3

Cost of Equity

Q.5)

=
=
=

R + (Rm R)
6.5 + 1.20 (8.5)
16.7

The following information is available of Docomo Ltd. Calculate EVA.

12% Debt Capital
Rs. 2,000 crores
Equity Capital
Rs. 500 crores
Reserves & Surplus
Rs. 7,500 crores
Capital Employed
Rs. 10,000 crores
Risk free rate
9%
Beta factor
1.05
Market rate of return
19%
Operating profit after tax
2,100 crores
Tax rate
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%

WACC
1.68
0.98
14.63
17.29

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) (%)

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1
3,000.00
850.00
80.00
40.00
1.10
12.50
10.00
19.00
4

2
3,500.00
1,250.00
70.00
35.00
1.20
12.50
10.00
19.00

3
4,000.0
1,600.0
120.0
13.0
1.3
12.5
10.0
20.0

Q.6 Solution)
Particulars
EVA = NOPAT (WACC x
CE)
(i) Calculation of NOPAT
EBIT
Tax
NOPAT
(iii)
Calculation of WACC
WACC for debt
Proportion
Cost
(A)
WACC for Equity
Proportion
Cost
(B)
(A + B) Total WACC
(vii)
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 ()

=
=
=
=

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

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The Companys 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.
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%
200
EBT
100%
(+) Interest:
Debentures
Loan
EBIT
(-) Tax @ 40%
238
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
500
50
45
595
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)
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EVA

=
=
=
=

NOPAT

NOPAT (WACC x CE)

117 (15.93% x 1,500)
117 238.95
(121.95)
=

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 companys
required rate of return on invested capital is 8%.
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Particulars
Sales Value (Rs.)
Income (Rs.)
Average Investment (Rs.)
Sales Margin (%)
Capital Turnover (Times)
ROI (%)
Residual Income (EVA) (Rs.)

Division A

Division B
Division C
2 Crore
8 Lakhs
40 Lakhs
50 Lakhs
20%
25%
2
20%
2,40,000

Hint: Economic Valued Added (EVA) = Net Income - COC

Q.11) Fill in the blanks
The following date pertains to three divisions of Adidas Company ltd. the companys
required rate of return on invested capital is 8%.
Particulars
Sales Value (Rs.)
Income (Rs.)
Average Investment (Rs.)
Sales Margin (%)
Capital Turnover (Times)
ROI (%)
Residual Income (EVA)(Rs.)

Division A

Division B
Division C
4 Crore
16 Lakhs
80 Lakhs
100 Lakhs
20%
25%
2
20%
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
Sales
Interest on investments
Profit on sale on old assets
Total Income
Less:
Manufacturing cost
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Rs.(in Lakhs)
Rs. (in Lakhs)
1,000
20
10
1,030
360
8

Administration cost
Selling and distribution cost
Depreciation
Loss on sale of an old Plant and
Machinery
EBIT
Less: Interest
EBT
Less: Tax (30%)
PAT
EPS [238 Lakhs/ 10 Lakhs]
P/E ratio

120
100
60
10

650
380
40
340
102
238
Rs. 23.8
3

Balance Sheet
Liabilities
Equity Capital (Rs. 10 share)
General Reserves
Debt
Creditors
Provisions
TOTAL

Rs.(in lakhs)
100
80
120
30
26
356

Assets
Buildings
Plant & Machinery
Stock
Receivable
Bank
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)
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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) (%)

1
1,800.00
510.00
48.00
60.00
1.50
10.50
8.00
10.00

2
2100.00
750.00
42.00
40.00
1.80
10.50
8.00
10.00

3
2400.00
960.00
72.00
20.00
2.10
10.50
8.00
10.00

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 Companys 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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10