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 Rs. ASSETS Rs.

Equity Capital (Rs. 10 share) 500 Buildings 800
Retained profits 400 Machinery 700
Term loan 600 Stock 100
Payables 150 Debtors 120
Provisions 130 Bank 60
TOTAL 1,780 TOTAL 1,780

The cost of equity and cost of debt is 14% and 8% respectively. The company pays 30%
corporate tax.

TYBMS 1 SSF
 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 = NOPAT – (WACC x CE)

= 1260 – (10.64% X 1500)
= 1100.4

Calculation of NOPAT
Sales 5000
(-) Operating Expenses 2900
(-) Depreciation 300
EBIT 1800
(-) Tax @ 30% 540
NOPAT 1260

Calculation of WACC
Sources Amt. Proportion Cost WACC
1 Equity Cap. 500 33.33 14% 4.67%
2 Retained 400 26.67 14% 3.73%
3 Term Loan 600 40.00 5.6% 2.24%
1500 100.00 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 = MPS x No. of Shares

= 59.2 x 50
= 2975
MPS
P/E Ratio =
EPS
MPS
2.5 =
23.8
 MPS = 2.5 x 23.8
 MPS = 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.

TYBMS 2 SSF
Q.3 Solution) EVA = NOPAT – (WACC x CE)
= 1200 – (12.8% x 10,000)
= - 80

Calculation of NOPAT
Sales 8,000
(-) Operating Expenses 4,000
(-) Depreciation 2,000
EBIT 2,000
(-) Tax @ 40% 800
EBT / NOPAT 1,200

Total Cost - Scrap

Depreciation =
Estimated Life
10,000
=
5
= 2,000

Calculation of WACC
D 3

E 2
3 2
D = x 10,000, E  x 10,000
5 5
= 6,000 , 4,000

Sources Amt. Proportion Cost WACC

Debt 6,000 60% 8% 4.8
Equity 4,000 40% 20% 8
10,000 100% 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 = 6.5%

Rm = 15%
 = 1.20

Equity Risk Premium = Rm – R

= 15 – 6.5
= 8.5%
Cost of Equity = R +  (Rm – R)
= 6.5 + 1.20 (8.5)
= 16.7

Q.5) The following information is available of Docomo Ltd. Calculate EVA.

TYBMS 3 SSF
 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. Proportion Cost WACC
Debt 2,000 20% 8.4% 1.68
Equity 500 5% 19.5% 0.98
R&S 7,500 75% 19.5% 14.63
10,000 100% 17.29

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) Compute EVA of BPCL 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 Profit before Interest 850.00 1,250.00 1,600.00
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

TYBMS 4 SSF
 Q.6 Solution)
Particulars Y1 Y2 Y3
EVA = NOPAT – (WACC x = 770 – (3,000 x 21.7%) = 1180 – (3,500 x 22.58%) = 1480 – (400 x 24.79%)
CE) = Rs.119 = Rs.389.7 = Rs.488.4
(i) Calculation of NOPAT
EBIT 850 1,250 1,600
– Tax 80 70 120
NOPAT 770 1,180 1,480
(ii) Calculation of WACC
WACC for debt
Proportion 40 35 13
Cost 19% 19% 20%
(A) 7.6% 6.65 2.6
WACC for Equity
Proportion 60 65 87
Cost 23.5% 24.5% 25.5%
(B) 14.1% 15.93 22.19
(A + B) Total WACC 21.7% 22.58 24.79
(iii) CE (Capital Employed) 3,000 3,500 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.

TYBMS 5 SSF
Q.7 Solution) EVA = NOPAT – (WACC x Capital employed)
= 357 – (12.95% x 2000)
= 357 – 259
= 98

Calculation of NOPAT

EAT (After dividend) 110

(+) Equity Dividend @ 20% 160
(+) Preference Dividend @ 12% 30
EAT (Before Dividend) 60% 300
(+) Tax @ 40% 200
EBT 100% 500
(+) Interest:
Debentures 50
Loan 45
EBIT 595
(-) Tax @ 40% 238
NOPAT 357

Calculation of WACC
Sources Amt. Cost Proportion WACC
Equity Share 800 21.5 40% 8.6
12% Pref. Share 250 12% 12.5 1.5
10% Debenture 500 6% 25.00 1.5
10% Term Loan 450 6% 22.5 1.35
2000 100.00 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 = NOPAT – (WACC x CE)

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

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NOPAT = EBIT = 180
- Tax 63 .
NOPAT 117
EBIT
DFL =
EBT
EBIT
1.5 =
EBIT  Interest
EBIT
1.5 =
EBT  60
 1.5 (EBIT – 60) = EBIT
 1.5 EBIT – 90 = 90
 1.5 EBIT – EBIT = 90
 EBIT = 180

Calculation of WACC

Sources Amt. Cost Proportion WACC

Equity 1000 66.67 20% 13.33
12% Debenture 500 33.33 7.8% 2.6
Capital Employed 1500 100.00 15.93

kd = 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 Equity Financing : 100
Project Life : 4 years Depreciation : Straight Line
Salvage Value : Nil Tax Rate : 50 %
Annual Revenues : 200 Annual Costs : 135
Cost of Equity : 15 percent (excluding depreciation, interest &
taxes)

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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 Balance Sheet
Liabilities Rs.(in lakhs) Assets Rs.(in lakhs)
Equity Capital (Rs. 10 share) 100 Buildings 160
General Reserves 80 Plant & Machinery 140
Debt 120 Stock 20
Creditors 30 Receivable 24
Provisions 26 Bank 12
TOTAL 356 Total 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 Rs. 1,200 lakhs

Equity Capital Rs. 300 lakhs
Reserves & Surplus Rs. 4,500 lakhs
Capital Employed Rs.6,000 lakhs
Risk free rate 8%
Beta factor 2
Market rate of return 20%
Operating profit after tax 1,260 lakhs
Tax rate 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

TYBMS 9 SSF
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.

TYBMS 10 SSF