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Illustration 6: Gross Value Added Statement and Reconciliation of GVA with PAT

On the basis of the following Income Statement of G Ltd., prepare - (a) Gross Value Added Statement; and
(b) Statement showing reconciliation of Gross Value Added with Prot Before Taxation. (Rs. 000)
Particulars Rs. 000s Rs. 000s
Income:
Sales Less Returns
Dividends and Interest
Miscellaneous Income


15,27,956
130
474
Total Income (A) 15,28,560

Expenditure:

26,054

13,42,010
1. Production & Operational Expenses:
Decrease in Inventory of Finished Goods
Consumption of Raw Materials 7,40,821
Power & Lighting 1,20,030
Wages, Salaries and Bonus 3,81,760
Staff Welfare Expenses 26,240
Excise Duty 14,540
Other Manufacturing Expenses 32,565

2. Administration Expenses:


40,450
7,810
32,640
Directors Remuneration
Other Administration Expenses

3. Interest on:


24,500

14,400 9% Mortgage debentures
Long-Term loan from Financial Institutions 10,000
Bank Overdraft 100

4. Depreciation on Fixed Assets:

50,600
Total Expenditure (B) 14,57,560

Prot before Taxation (A) - (B)

18,212
71,000
Less: Provision for Income Tax 25,470
Prot after Taxation 45,530
6.300 Balance of P & L A/c as per last Balance Sheet
Total available for appropriation 51,830
Transferred to:

43,030
General Reserve 40% of Rs.45,530
Proposed Dividend at 22% 22,000
Tax on Distributed Prots at 12.81% 2,818
Surplus carried to Balance Sheet 8,800




Solution:
Value Added Statement of G Ltd.
Particulars Rs. 000s Rs. 000s %
Sales less Returns

9,34,010
15,27,956
Less: Bought In Materials & Services (13,42,010 - 3,81,760 - 26,240)

Administration Expenses 32,640

Interest on Bank Overdraft 100 9,66.750
Value Added by Manufacturing and Trading Activities 5,61,206
Add: Dividend & Interest Received 130
Miscellaneous Income 474
TOTAL VALUE ADDED (See Note below) 5,61,810

APPLICATION OF VALUE ADDED Rs. 000s Rs. 000s %
a. To Pay Employees: Wages, Salaries & Bonus
Staff Welfare Expenses
b. To Pay Directors: Directors Remuneration
c. To Pay Government: Income Tax
Tax on Distributed Prots
d. To Pay to providers of Capital: Interest on 9% Debentures
Interest on long-term loan from nancial institution
Dividend to Shareholders
e. To provide for maintenance and expansion of the Company:
Depreciation on Fixed Assets
Transfer to General Reserve
Retained Prots (8,800 - 6,300)
3,81,760
26,240

4,08,000
7,810

28,288

46,400

71,312

72.62
1.39

5.04

8.26

12.69

25,470
2.818
14,400
10,000
22.000

50,600
18,212
2,500
TOTAL APPLICATION 5,61,810 100.00

Reconciliation of Total Value Added with Prot before Taxation

Particulars Rs. 000s Rs. 000s
Prot Before Taxation

3,81,760
71,000
Add back: Wages, Salaries & Bonus
Staff Welfare Expenses 26,240
Directors Remuneration 7,810
Interest on 9% Mortgage Debentures 14,400
Interest on Long-Term loan from Financial Institution 10,000
Depreciation on Fixed Assets 50,600 4,90,810
Total Value Added 5,61,810

Note: Excise Duty may alternatively be shown as an application of Value Added under To pay Government.

Illustration 7: GVA Statement Calculation of Excise Duty Nov2004
The following is the Prot and Loss Account of Haalaasi Ltd. for the year ended 31st March. Prepare a GVA
Statement of K Ltd., and show also the reconciliation between Gross Value Added and Prot before Taxation.
Prot and Loss Account for the year ended 31st March

Particulars Rs. Lakhs Rs. Lakhs
Income: Sales 890 945
Other Income 55

Expenditure: Production and operational expenses 641
720 Administration expenses (Factory) 33
Interest 29
Depreciation
17
Prot Before Taxes

45
225
Less: Provision for Taxes
30
Prot After Tax
195
10
Add: Balance as per Balance Sheet
Less: Transferred to General Reserve
205
140
Dividend Paid
95
Surplus carried to Balance Sheet 65
1. Production and Operational Expenses consists of
Consumption of Raw materials 293
Consumption of stores 59
Salaries, Wages, Gratuities etc. (Admn.) 82
Cess and Local taxes 98
Other manufacturing expenses 109
2. Interest Charges Consists of
Int. on loan from ICICI Bank for working capital 9
Interest on loan from ICICI Bank for xed loan 10
Interest on loan from IFCI for xed loan 8
Interest on Debentures 2
3. Administration Expenses include Salaries to
Directors Rs. 9 lakhs. Provision for doubtful debts
Rs. 6.30 lakhs.
4. The charges for taxation Include a transfer of Rs. 3
lakhs to the credit of Deferred Tax Account.
5. Cess and Local Taxes include Excise Duty, which is equal to 10% of cost of bought-in material.

Solution:
Value Added Statement of K Ltd. for year ending 31
st
March
Particulars Rs. Lakhs
Sales 890.00
Less: Cost of Bought in Materials & Services (Note 1) 461.00
Administrative Expenses (Note 2) 17.70
Interest (Note 3) 9.00
Excise Duty (Rs.461 x 10%) 46.10
Value Added from Manufacturing and Trading Activities 356.20
Add: Other Income 55.00
TOTAL VALUE ADDED 411.20
Application of Value Added % Rs. Lakhs
To Pay Employees (Note 4) 20% 82.00
To Pay Directors (Note 5) 2% 9.00
To Pay Government (Note 6) 20% 81.90
To Pay Providers of Capital (Note 7) 28% 115.00
To Provide for Maintenance & Expansion of the Company (Note 8) 30% 123.30
TOTAL APPLICATION 100% 411.20

Working Notes:
a. Cost of bought in materials and services includes Raw materials, stores and other manufacturing expenses, i.e., 293
+ 59 + 109 = Rs.461 Lakhs.
b. Administrative Expenses excludes Commission to Directors and Provision for debts i.e., [Rs.33 - (Rs.9 +
Rs.6.3)] which is Rs. 17.70 Lakhs.
c. Interest on Working Capital - ICIC1 Bank is Rs. 9 Lakhs.

d. Employees: Salaries, Wages, Gratuities etc. is Rs. 82 Lakhs.

e. Directors - Salaries and Commission to Directors is Rs. 9 Lakhs.
f. Payment to Government includes Cess and Local Taxes (Rs.98 Lakhs Less Rs.461 Lakhs x 10%), Deferred
Taxes and Provision for taxation i.e., (Rs.51.9 + Rs.3 + Rs.27 = Rs. 81.9 Lakhs.
g. Payment to Providers of Capital includes interest on Fixed Loan (Rs. 10 Lakhs + Rs. 8 Lakhs), Interest on
Debentures and pividend i.e., Rs. 18 + Rs. 2 + Rs. 95 = Rs. 115 Lakhs.
h. Retained earnings and Depreciation includes depreciation, Transfer to General Reserve, Retained Prot
and Provision for doubtful debts i.e., Rs.17 + Rs.45 + Rs.55 + Rs.6.3 = Rs. 123.30 Lakhs.

Illustration 1: EVA Computation
Compute EVAof Sarin Ltd. for 3 years from the information given (in Rs. Lakhs)

Year 1 2 3
Average Capital Employed 3,000.00 3,500.00 4,000.00
Operating Prot before Interest (adjusted for tax Effect) 850.00 1250.00 1600.00
Corporate Income Taxes 80.00 70.00 120.00
Average Debt+Total Capital Employed (In %) 40.00 35.00 13.00
Beta Variant 1.10 1.20 1.30
Risk Free Rate (%) 12.50 12.50 12.50
Equity Risk Premium (%) 10.00 10.00 10.00
Cost of Debt (Post Tax) (%) 19.00 19.00 20.00

Solution: EVA Statement of Sarin Ltd.

Particulars Year l Year 2 Year 3
1. Cost of Equity (K
e
) = Risk Free Rate+ 12.5+(1.1 x 10) 12.5 + (1.2 x 10) 12.5 +(1.3 x 10)
(Beta x Equity Risk Premium) = 23.50% = 24.50% = 25.50%
2. Cost of Debt (K
d
) (given) 19.00% 19.00% 20.00%
3. Debt Equity Ratio (Debt = given; Equity is bal. g) 40% & 60% 35% & 65% 13% & 87%
4. WACC = [(K
d
) x Debt % + (K
e
) x Equity%] 21.70% 22.58% 24.79%
(23.50x60% + (24.50 x 65% + (25.50 x 87% +
19x40%) 19 x 35%) 20 x 13%)
5. Average Capital Employed (given) 3,000.00 3,500.00 4,000.00
6. Capital Charge (Fair Return to Providers of Capital 3,000x21.70% 3,500 x 22.58% 4,000 x 24.79%
i.e. Average Capital Employed x WACC) (4 x 5) = 651.00 = 790.30 = 991.60
7. Operating Prot before Taxes & Interest 850.00 1,250.00 1,600.00
8. Less: Taxes Paid 80.00 70.00 120.00
9. Operating Prot after Taxes (This is the return to the
Providers of Capital i.e. Debt and Equity)
770.00 1,180.00 1,480.00
10. Capital Charge (computed in 6 above)
651.00 790.30 991.60
11. Economic Value Added (9 - 10)
119.00 389.70 488.40
12. EVA as a % of Average Capital Employed 3.96% 11.13% 12.21%

Illustration 2: EVA Computation using WACC, Equity Risk Premium etc.
The Capital Structure of Himesh Ltd. is as under:
a) 80,00,000 Equity Shares of Rs.10 each = Rs.800 Lakhs
b) 1,00,000 12% Preference Shares of Rs.250 each = Rs.250 Lakhs
c) 1,00,00010% Debentures of Rs.500 each = Rs.500 Lakhs
d) Term Loan from Bank (at 10%) = Rs.450 Lakhs.
The Companys Prot and Loss Account for the year showed a balance PAT of Rs.100 lakhs, after appropriating
Equity Dividend at 20%. The Company is in the 40% tax bracket. Treasury Bonds carry 6.5% interest ad 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.
Solution:
1. Prot and Loss Statement
Particulars Commutation Rs. Lakhs
Prot before Interest and Taxes
Less: Interest on Debentures
Interest on Bank Term Loan
Prot before Tax
Less: Tax at 40%
Prot after Tax
Less: Preference Dividend
Residual Earnings for Equity Shareholders
Less: Equity Dividend
Net Balance in P & L Account
Balancing gure
10% x Rs.500 Lakhs
10% x Rs.450 Lakhs (Rs.290.00 - 60%)

(Rs.290.00 60%) x 40%
Reverse working
12% x Rs.250 Lakhs
Reverse working
20% x Rs.800 Lakhs
Given
578.33
50.00
45.00
483.33
193.33
290.00
30.00
260.00
160.00
100.00

2. Computation of Cost of Equity: K
e
= Risk Free Rate + Beta x (Market Rate - Risk Free Rate)
= 6.5% + 1.5 (16.5% - 6.5%) = 21.5%.
3. Computation of WACC:
Component Amount Ratio Individual Cost WACC
Equity Rs. 800 Lakhs 800 2000 - 40.0% K
e
=21.5% 8.60%
Preference Rs. 250 Lakhs 250 2000= 12.5% K
p
= 12% 1.50%
Debt Rs. 950 Lakhs 950 2000 = 47.5% K
d
= Interest x (100 - Tax Rate)
= 10% x (100% - 40%) = 6%
2.85%
Total Rs.2,000 Lakhs K
o
= 12.95%
4. Computation of EVA:
Particulars Rs. Lakhs
Prot before Interest and Taxes (from WN 1)
Less: Taxes
578.33
193.33
Net Operating Prot After Taxes i.e. Return to Providers of Capital
Less: Capital Charge (Fair Return to providers of Capital) = WACC x Cap Emp
385.00
2,000 x 12.95% = 259.00
Economic Value Added 126.00






Illustration 3: EVA using Financial Leverage, PE Ratio

From the following information, compute EVA of Auto Ltd. (Assume 35% tax rate)
Solution:

a. Equity Share Capital = Rs.1,000 Lakhs b.
12% Debentures = Rs.500 Lakhs Financial Leverage = 1.5 times