Advanced Financial Management Corporate Restructuring and Corporate
Calculating EVA|
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From the following extracts of financial data pertaining to HS Ltd., an IT company,
you are required to calculate the value of the brand of the company:
@ :
Year ended on 31% March 2022 2021 2020
EBIT Z lakhs 750 525 280
Non-branded income @ lakhs 60 45 15
Inflation (%) 8 15 1
Remuneration of Capital 5% of Average Capital Employed
Average capital employed @ lakhs 1,450
Corporate tax rate 30%
Capitalization factor 15%
(ii) The following information is available to a concern.
Calculate Economic Value Added (EVA).
12% Debt % 2,000 crores
Equity capital = 500 crores
Reserves and Surplus % 7,500 crores
Risk free rate 9%
Beta factor 1.05
Market rate of return 19%
Equity (market) risk premium 10%
Operating profit after tax % 2,100 crores
Tax rate = 30%
Calculation of Brand Value as at 31.3.2022 (@ in lakhs)
EBIT @ lakhs 280
Less Non-branded income & lakhs 45 15
Adjusted profit = lakhs 480 265
Inflation (%) 15 1
Inflation compound factor 1.08 1,242
PV of profit 518.4 329.13
Weight 2 1
Weighted Profits 1036.8 329.13
Weighted Average profit | 572.655 = 573Brand Earnings
vation factor
Capitaliz
Brand value € lakhs
12% x(1- 0.3) = 8.40%
9% + 1.05 (19% - 9%) = 19.5%
Cost of Debt (Ke) = Interest x (1 - tax rate)
Cost of Equity (Ke) = Risk free rate + (Beta x
Market Risk Premium)
Debt equity ratio (as given in the question)
WACC = [ kg) x Debt % (Ke) x Equity 9%] (8.40 x 20% + (19.5 x 80%) = 17.28%
Operating Profit before tax % 2,100 crores
EVA = NOPAT ~ Cost of Capital Employed
= [R 2100 cr) - (17.28%) x & 10,000 cr]
= %2100cr.- % 1728 cr,
= %372cr.
CdSe ae 7
Pizza Hut Ltd. has existing assets in which it has capital invest d
After Tax Operating Income is % 20 Crores & Company has a Ce %
Estimate the Economic Value Added. (EVA) of the firm, ai
20% & 80%
OFF 150 crores, The
Of Capital of 1294
Solution : Capital Employed = 150 crores
NOPAT = 20 crores
WACC = 129%
EVA = NOPAT- (WACC x CE)
= 20-(12% x. 150) = 2 Crores
1.68Corporate Restructuring ‘and Corporate ~~
‘advanced Financial Management
“The Income Statement and Balance Sheet of Alpha Company Ltd. is given
below:
The cost of equity and cost of debt is 14% and 8% respectively. The company pays
30% corporate tax.
From the information given you are required to calculate the EVA.
EVA = NOPAT- (WACC x CE)
= 1260 - (10.64% x 1500) = 1100.40
1.69
| Sales
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) 3238
P/E ratio 2.5
Balance Sheet
Equity Capital & 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 1,780nced Financial Mana
Calculation of NOPAT a
Sales a
~ (Operating Expenses 2,9
oes s
i
() Tax @ 30% —
NOPAT
Calculation of
7%
33,33 14%
tame wo 26.67 14% 3.73%
Retained 400 1s a
40.00 6%
Term Loan 600 zat
1,300 100.00 ie
kd = I(1-tax)
= 8(1-0.3)
= 5.6
ke) ae
Navigator Ltd. is considering a capital project for which the following information
available : 5
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 30%
Annual costs (excluding
depreciation, interest & taxes) 41000 | Cost of debt (post tax) 8%
Calculate EVA of the project over its life.
EVA = NOPAT~(WACC x ce)
1200 - (12.8% x 10,000)
-80
Calculation of NOPAT /
Sales 8,000 |
() Operating Expenses 4,000 /
{) Depreciation a |
(Tax @ 40% 800
EBT
7 NOPAT 1.200 |ced Financial Manage:
advan *gement Corporate Restructuring and Corporate
Depreciation = 1otalCost= Scrap
7 Estimated Life
| 10,000
| 5 5 = 2,000
Ca Iculation of WACC
D_3
EF 2
pee 2
= 5 x 10,000, E = 5 x 10,000
The following information is available of Docomo Ltd. Calculate EVA.
12% Debt Capital : % 2,000 crores
Equity Capital %500 crores
Reserves & Surplus % 7,500 crores
Capital Employed (CE) % 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%
Solution : EVA = NOPAT- (WACC x CE)
= 2,100- Ce x 10, 000) = 371
Calculation of WACC
1.68
0.98
14.63
17.29
4.71Corporate Restructuring and
Advanced Financial Management is
= I(1-
Cost of Debt (kd) p03)
= 84% i?
ity (ke) = Re + @ (RM—-
Cost of Equity ( e) arene :
= 9+1.05x10
= 19.5%
Questions For Discussion —s_. i
1. What is Corporate Restructuring ? State its Need.
2. State the Types of Corporate Restructuring.
3. Explain the concept of Financial Distress, State its Reasons.
What is Cash Flow Statement ? State its Objectives.
What is Funds Flow Statement ?
Explain about Preparing Funds Flow Statement.
What is EVA ? State its Advantages and Drawbacks, -
Write Short Notes
(A) Financial Distress Predictors.
(B) Financial Statements.
(Q. Functions of EVA,
(D) Funds Flow Statement vs. Cash Flow Statement.
ob te op
4.
5.
6.
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