Valuation of Business Solution
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1
VALUATION OF BUSINESS
Q1 Valuation of business
Net assets method – Mkt. value of assets – Mkt value of liabilities
STATEMENT OF NET ASSETS
Land and building 96
Plant and Machinery 100
Investments 10
Stock 20
Debtors 15
Cash and bank 5
Creditors (30)
Net Assets 216
No. of shares 10
NAV per share 21.6
Profit earning capacity or earning capitalization method – capitalized future
maintainable profits
Statement of Future Maintainable profits
Current years operating profit 64
- extraordinary income (4)
- Income from investments likely to recur (1)
- Additional investment expenses (5)
-Additional depreciation (6)
Future maintainable profit before tax 48
Future maintainable profit after tax 33.6
Value on the basis of operating assets 𝐹𝑢𝑡𝑢𝑟𝑒 𝑚𝑎𝑖𝑛𝑡𝑎𝑖𝑛𝑎𝑏𝑙𝑒 𝑝𝑟𝑜𝑓𝑖𝑡𝑠
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒
= 33.6
0.15
= 224
Total value of shares = value as per operating assets + non operating assets
224 + 10 (investments)
= 234
Value per share as per earning capitalization method = 234
10 = 23.4
Value of share on the basis of fair price method = 23.4 + 21.6
2 = 22.5
2
Q2 Current value of business is capitalised value of all future maintainable profits
Statement of FMP
PAT 65
PBT 100
Extrordinary income (10)
Extraordinary exp 3
Income of new project 27
FMP before tax 120
Tax 35 % 42
FMP after tax 78
Value of business 78
0.15 = 520
b. FMP 78
Pref dividend (11)
Profir for equity 67 lac
No. of shares 40 lac
EPS 67
40 = 1.675
MP = EPS X PE
= 1.675 x 8
= 13.4
Q3 Range of valuation of company refers to Maximum and minimum value of business
Minimum value of business means premerger value of business i.e 1.5 cr x 400
600 cr
Maximum value of business is present value all future cash flows
1 250 0.893 223.25
2 300 0.797 239.1
3 400 0.712 284.84
747.15
Q4 Par value per share = ₹ 40 / sh
Equity share cap = ₹ 1300 crore
Number of shares = 1300 / 40 = 32.5 crore shares
PAT = 290 crore
PAT per share = 290 / 32.5 = 8.92 / share
Value per share is PV of all future FCFE
FCFE = PAT – ( 1 - 𝑑
𝑑+𝐸 )( CE – depn + ch in WC)
= 8.92 – (1 – 0.27) (47 -39 + 3.45)
= 0.5615
3
Ke = RF + βE (RM - RF)
= 8.7 + 0.1(10.3 – 8.7)
= 8.86 %
Value of share = 𝐹𝐶𝐹𝐸1
𝑘𝑒 − 𝑔
= 0.5615 (1.08)
0.0886 − 0.08 = ₹ 70.51 / sh
Q5 Balancesheet for 2008
8% debentures 125
10% Bonds 50 assets 600
Equity shares 100
Reserves & surplus 300
Short term loan (B/f) 25
a. Asset turnover ratio 1.1 (sales / assets)
Assets 600
Sales 600 x 1.1 = 660
Operating margin 10% of 660 = 66
Income statement
EBIT 66
PAT 39.60
Interest 8% of 200 16
Profit for equity share holders 23.60
b. G = b.r
Retention ratio = b = ( 1 – d/p ratio)
= ( 1 – 0.1667)
= 0.8333
R = Roe = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑒𝑞𝑢𝑖𝑡𝑦
𝐸𝑞𝑢𝑖𝑡𝑦+ 𝑅𝑒𝑠 & 𝑠𝑢𝑟𝑝𝑙𝑢𝑠
= 23.60
100+300
= 5.9%
G = 0.8333 x 5.9
= 4.91%
4
c. P0 = 𝑑1
𝑘𝑒− 𝑔
Profit for equity = 23.6 lac
No. of shares = 10 lac
Profit per share = 2.36
Div per share = 2.36 x 0.1667
= 0.393
= 0.393 (1.049)
0.15 −0.049 = 4.09
d. Fair price of share is Rs 4.09
Current market price = ₹ 14
Since current market price is more than fair price, share is overpriced.
So investment should not be made in such shares.
Q6 Statement of free cash flows
1 2 3 4 5
EBIT 360 432 518 622 684
EAT 252 302 363 435 479
+depn 240 288 346 415 -
- CE 336 403 484 581 -
- Ch in WC 100 120 144 173 104
56 67 81 96 375
Overall cost of capital for 1st 4 yrs
Ke = RF + βE (RM - RF)
= 10 + 1.15(8.8)
= 20.12
Kd = 13% (1 – 0.3)
WACC = WEKE + WDKD
= 0.5 x 20.12 + 0.5 x 9.1
= 14.6
Overall cost of capital from 5th year
Ke = RF + βE (RM - RF)
= 9 + 1(8.8)
= 17.8
Kd = 12.86 ( 1 – 0.3)
WACC = WEKE + WDKD
= 3/5 x 17.8 + 2/5 x 9.002
= 14.28%
5
Statement of value of firm
Year Cash flow factor PV
1 56 0.873 49
2 67 0.761 51
3 81 0.664 54
4 96 0.580 56
4 375
0.1428 − 0.10 = 8761 0.580 5082
5292
Q7 Analysis –
a. This ques requires to ascertain Value of company or firm but further ask to
determine MP of share is correct or not.
Value of co = Value of equity + value of debt
From value of firm we vl deduct value of debt to get value of equity
b. Current value of firm is present value of all future free cash flows
But while computing value of firm we assume debt is not repaid i.e debt equity
ratio is maintained. However this ques mentions 30% debt is repaid in
2014(5th yr). it will be taken as normal cash outflow in 5th year and from 2015
ie 6 th year debt equity ratio will change so will WACC.
Statement of computation of tax rate
EBIT 245 lac
Interest 218.125 lac
EBT 26.875 lac
PAT (given) 17.20 lac
Tax paid 9.675 lac
Rate of tax 9.675/26.875 = 36%
Rate of interest on debt = 218.125
1934 = 11.28%
Statement of WACC WACC till 2014 = WEKE + WDKD
= 75 𝑙𝑎𝑐 𝑋 66
4650 +1934 x 16 +
1934
4650+1934 x 11.28(1-0.36)
= 13.54%
WACC from 2015 = WEKE + WDKD
6
= 75 𝑙𝑎𝑐 𝑋 66
4650 +1353.8 x 16 +
1934
4650+1353.8 x 11.28(1-0.36)
= 14.42%
Annual cash flows from 2015 are given
Statement of Free cash flow of firm
10 11 12 13 14
EBIT 264.6 285.77 308.63 333.32 360
PAT 169.344 182.89 197.52 213.32 230.39
Inc in Working cap 3.52 3.80 4.11 4.43 4.79
Debt repayment - - - - 580.2
FCFF 165.824 179.09 193.41 208.89 -354.6
Statement of value of firm
Year Cash flows Factor PV
2010 165.824 0.8807 146.10
2011 179.09 0.7757 138.97
2012 193.41 0.6832 132.10
2013 208.89 0.6017 125.75
2014 -354.6 0.53 -187.93
2014 240.336
0.1442 − 0.06 0.53 1512.735
867.725
Value of equity = value of company – outstanding debt
= 867.725 - 1353.80
= 513.925 lac
Value per share = 513.925 / 75 = 6.852
Value determined 6.852 is lower than actual MP of share, so share is overvalued
Q8 Statement of Free cash flow of firm
02 03 04 05 06 07
EBIT 500(1.09) 545(1.09) 594(1.09) 647.46(1.09) 705.73(1.09) 769.25(1.04)
= 545 = 594 = 647.46 = 705.73 = 769.25 = 800
Tax (35%) 190.75 207.9 226.61 247 269.25 280
PAT 354.25 386.1 420.85 458.73 500 520
+Depn 200(1.09) 218(1.09) 237.62(1.09) 259(1.09) 282.31(1.09)
= 218 = 237.62 = 259 = 282.31 = 307.72 CE = Depn
Less CE 300(1.09) 327(1.09) 356.43(1.09) 388.51(1.09) 423.48(1.09)
= 327 = 356.43 = 388.51 = 423.48 = 461.59 CE = Depn
Less Ch in WC 7000(1.09) 7000(1.09)2 7000(1.09)3 7000(1.09)4 7000(1.09)5 7000(1.09)5(1.04)
(0.2)-1400 (0.2)-1526 (0.2)-1663.4 (0.2)-1813.04 (0.2)- 1976.21 (0.2) – 2154.07
= 126 = 137.34 = 149.6 = 163.17 = 177.86 = 86.17
FCFF 119.25 129.95 141.74 154.39 168.27 433.83
7
Overall cost of capital from 2002 – 2006(5 yrs)
Ke = RF + βE (RM - RF)
= 7 + 1.2(5.5)
= 13.6
Kd = 10%
WACC = WEKE + WDKD
= 0.5 x 13.6 + 0.5 x 0.10(1 – 0.35)
= 10.05%
Overall cost of capital from 2007
Ke = RF + βE (RM - RF)
= 7 + 1(5.5)
= 12.5
Kd = 9%
WACC = WEKE + WDKD
= 0.75 x 12.5 + 0.25 x 0.10(1 – 0.35)
= 11%
Value of firm = PV of all future free cash flow of firm.
Year FCFF Factor PV
1 119.25 0.909 108.40
2 129.95 0.826 107.34
3 141.74 0.750 106.31
4 154.39 0.681 105.14
5 168.27 0.619 104.16
6 5 433.83
0.11−0.04
= 6197.57 0.619 3836.30
4367.65
Q10 value of firm according to book value weights = 750 lac
FCFF1 = 30 lac
G = 5%
Value of firm is present value of all future free cash flows
Po = 𝐹𝐶𝐹𝐹1
𝑊𝐴𝐶𝐶 − 𝑔
750lac = 30
𝑊𝑎𝑐𝑐 − 0.05
WACC = 30
750 + 0.05
= 9%
WACC = WEKE + WDKD
9 = x (12) + (1-x) 6
X = 0.5
8
Market value of equity = 3 Book value of equity
= 3 x 0.5
= 1.5
Market value of debt = Book value of debt
= 0.5
WACC (Mkt value) = WEKE + WDKD
1.5
2 x 12 +
0.5
2 x 6
= 10.5
Po = 𝐹𝐶𝐹𝐹1
𝑊𝐴𝐶𝐶 − 𝑔
= 30
0.105 − 0.05 = 545.45
Q11 a. d0 = 8.5 g = 7.5%
EPS = 27.50 RF = 12.5%
MP = 210.20 BV = 130.55
Po = 𝑑1
𝑘𝑒 − 𝑔
= 8.5 ( 1.075)
0.125 − 0.075
= 182.75
Fair price to BV ratio = 𝐹𝑎𝑖𝑟 𝑝𝑟𝑖𝑐𝑒
𝐵𝑉
= 182.75
130.55 = 1.40
b. 𝐸𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
𝐵𝑉 =
210.20
130.55
= 1.61
𝑃0
𝐵𝑉 =
𝑅𝑂𝐸(1−𝑏)(1+𝑔)
𝑘𝑒− 𝑔
b = 27.5 − 8.5
27.5 = 0.691
1.4 = 𝑅𝑂𝐸(1−0.691)(1+0.075)
0.125− 0.075
1.4(0.05) = ROE x 0.3322
ROE acc to fair price = 0.2107
ROE according to existing price
𝐸𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝑃0
𝐵𝑉 =
𝑅𝑂𝐸(1−𝑏)(1+𝑔)
𝑘𝑒− 𝑔
1.61 = 𝑅𝑂𝐸(1−0.691)(1+0.075)
0.125− 0.075
9
ROE = 0.2423
Increase in ROE to justify existing price to BV ratio of 1.61 =
0.2423 − 0.2107
0.2107 x 100 = 15%
Q12 a. Statement of PV of FCFF
Year FCFF Factor PV
1 213(1.15) = 245 0.917 224.665
2 245(1.15) = 281.75 0.842 237.23
3 281.75(1.15) = 324.01 0.772 250.14
4 324.01 (1.15) = 372.61 0.708 263.81
5 372.61(1.15) = 428.50 0.650 278.53
6 5 428.5 (1.05)
0.09−0.05 = 11,248.13 0.650 7311.29
8565.665
b. value of firm = PV of FCFF + PV of non operating profit
(PV of operating profit) (PV of future intt from market sec)
= 8575 + 650
= 9225
Value of firm = Value of equity + Value of debt
9225 = VE + 2600
VE = 9225 – 2600
= 6625
Q13 a. Ke = RF + βE (RM - RF)
= 6.25 + 1.05 (5.5)
= 12.025
Po = 𝑑1
𝑘𝑒 − 𝑔
= 1.7 ( 1+0.07)
0.12025 − 0.07 = ₹ 36.20
b. Value per share is PV of all future FCFE
FCFE = PAT – ( 1 - 𝑑
𝑑+𝐸 )( CE – depn + ch in WC)
= 3.20 – ( 1 - 1600
1600 + (160 𝑋 51) ) (
475
160 -
350
160 )
= 3.2 – ( 9760 − 1600
9760 ) (0.78125)
= ₹ 2.55 / share
Value per shar = 𝐹𝐶𝐹𝐸1
𝑘𝑒 − 𝑔
= 2.55 (1.07)
0.12025 − 0.07 =
2.7285
0.05025
Value per share = ₹ 54.30
10
c. under a dividend discount model, future dividends payable to equity are capitalized to
determine current market price i.e total earning or EPS is not discounted for
determination of Market price.
Under FCFE method total cash flow available for equity is discounted to determine
current market price.
Market price according to FCFE shall be considered as a benchmark to compare with
actual market price.
Q14 P0 = 38.5
EPS = 1.36
DPS = 0.64
PE = 28.3
Price/BV = 7.1
Price/sales = 2.9
ROE = 27%
Profit margin on sales = 10.9%
Rf = 4.9%
Rm – Rf = 5.5%
β = 1.2
a. According to CAPM
Required return on equity = RF + β (RM - RF)
= 4.9 + 1.2 ( 5.5%)
= 11.5%
b. g = 9%
PE ratio = 𝐶𝑀𝑃( 𝑃0 )
𝐸𝑃𝑆 Po =
𝑑1
𝑘𝑒 − 𝑔
= 𝑑1
𝑘𝑒 − 𝑔 x
1
𝐸𝑃𝑆
= 𝐸0 ( 1+𝑔)(1−𝑏)
𝑘𝑒 − 𝑔 x
1
𝐸𝑃𝑆
= ( 1+𝑔)(1−𝑏)
𝑘𝑒 − 𝑔 EPS = 1.36
= ( 1+0.09)( 0.47)
0.115 − 0.09 Div = 0.64
= 20.49 D/P ratio (1-b)= 0.64
1.36 = 0.47
P/B ratio = 𝑅𝑂𝐸(1−𝑏)(1+𝑔)
𝑘𝑒− 𝑔
= 0.27 ( 0.47)(1.09)
0.115 − 0.09
= 5.53
11
If ROE is based on expected earnings of next time period
PB ratio can b calculated as
PB ratio = 𝑅𝑂𝐸 − 𝑔
𝑘𝑒− 𝑔
P/S ratio = 𝐸0 ( 1+𝑔)(1−𝑏)
𝑘𝑒 − 𝑔 x
1
𝑠𝑎𝑙𝑒𝑠
= 𝑠𝑎𝑙𝑒𝑠 𝑋 𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 𝑟𝑎𝑡𝑖𝑜 ( 1+𝑔)(1−𝑏)
𝑘𝑒 − 𝑔 x
1
𝑠𝑎𝑙𝑒𝑠
= 𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 𝑟𝑎𝑡𝑖𝑜 ( 1+𝑔)(1−𝑏)
𝑘𝑒 − 𝑔
= 0.109 (1.09)(0.47)
0.115 − 0.09
= 0.05584
0.025 = 2.2336
b. Statement of evaluation
existing Required
PE ratio 28.3 20.49 existing > required = under
PB ratio 7.10 5.53 existing > required = under
P/S ratio 2.90 2.2336 existing > required = under
Thus according to PE ratio and PB ratio and PS ratio, security is underpriced
Q16 Balance sheet
2002 2003 2002 2003
S. Capital 200 1080 Fixed assets 500 600
Reserves 140 Stock 300 360
L.T.Loan 360 Debtors 240 288
ST.Loan 200 Cash / Bank 60 72
Creditors 120 144
Provisions 80 96
1100 1320 1100 1320
Amount of finance = Revised Eq & Debt - Existing Eq & Debt
= 1080 - ( 200 + 140 + 360 + 200)
= 180
Revised sales value = 600 x 120% = 720 lac
For 2003
Profit for 2003 = 720 x 4% = 28.80
Dividend = 50% of profit = 14.40
Retention = 14.40
12
Amount of External Finance = Total finance – Addition to retained earnings
= 180 – 14.4 = 165.6
Current ratio = 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑐.𝐿𝑖𝑎𝑏 +𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑆.𝑇 𝑙𝑜𝑎𝑛
1.33 = 360 +288+72
144+96+𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑆𝑇 𝑙𝑜𝑎𝑛
Revised ST loan = 301.35
Additional ST loan = Revised – Existing
= 301.35 – 200
= 101.35
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝐹𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝐿𝑇 𝑙𝑜𝑎𝑛 = 1.5
600
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝐿𝑇 𝑙𝑜𝑎𝑛 = 1.5
Revised LT loan = 400
Additional LT loan = Revised - Existing
= 400 – 360
= 40
External finance = 165.60
Additional ST Loan + Additional LT loan + Additional EQ = 165.60
101.35 + 40 + Additional Eq = 165.60
Additional Eq = 24.25
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝐿𝑇 𝑑𝑒𝑏𝑡𝑠
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝐸𝑞𝑢𝑖𝑡𝑖𝑒𝑠 =
360 +40
200+140+14.4+24.25
= 400
378.65 = 1.05
Q17 Statement of free cash flow
Alpha Beta
Sales 96,000 48,000
Less : COGS 72,000 28,800
EBIT 24,000 19,200
Tax 9600 7680
Free cash flow 14,400 11,520
13
Value of firms before merger = 𝐹𝐶𝐹𝐸1
𝑘𝑒 − 𝑔
alpha = 14,400 (1.04)
0.10 − 0.04 = 2,49,600
Beta = 11,520 (1.06)
0.12−0.06 = 2,03,520
Combined value of firm with no synergy = 4,53,120
Value of firm with synergy effect on combining the two firms, the cost of goods
sold is reduced from 70% to 65% of sales.
sales of combined firm = Rs 96,000 + Rs 48,000 = Rs 1,44,000
Cost of goods sold = Rs 1,44,000 x 0.65 = Rs 93,600
WACC of combined firm = 0.10 x 2,49,600
4,53,120 + 0.12 x
2,03,520
4,53,120 = 11%
Weighted average expected growth rate for the combined firm
= 0.04 x 0.550847 + 0.06 x 0.4491525
= 0.022 + 0.027
= 5%
Statement of Free cash flow Firm with no synergy Firm with synergy
Sales 1,44,000 1,44,000
COGS 1,00,800 93,600
EBIT 43,200 50,400
G 5% 5%
Cost of cap 11% 11%
Free cash flow EBIT x (1 – 0.4) 25,929 30,240
Value of firm without synergy = 25,920 (1.05)
0.11−0.05 = 4,53,600
Value of firm with synergy = 30,240 (1.05)
0.11 − 0.05 = 5,29,200
Q19 Financial leverage = 1.4
𝐸𝐵𝐼𝑇
𝐸𝐵𝑇 = 1.4
𝐸𝐵𝐼𝑇
𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 1.4
EBIT = 1.4 EBIT - 1.4 x 40
0.4 EBIT = 56
EBIT = 140 WACC = WEKE + WDKD
= 170 + 130
300 + 400 17.5 +
400
700 x 10 (1 – 0.3)
= 11.5
14
EVA = EBIT (1 – tax rate) - WACC x Total Investment
= 140lac (1 – 0.3) - 0.115 x 700 lac
= 17.5 lac
Q20 a WACC = WEKE + WDKD
Orange = 0.2 x 26 + 0.8 x 16(1 – 0.35) = 13.52
Grape = 0.5 x 22 + 0.5 x 13 (1 – 0.35) = 15.225%
Apple = 0.2 x 20 + 0.8 x 15 (1 – 0.35) = 17.95%
b EVA = EBIT (1 – tax rate) - WACC x Total Investment
Orange = 25,000(1 – 0.35) – 0.1352 x 1,00,000 = 2,730
Grape = 25,000 (1 – 0.35) – 0.15225 x 1,00,000 = 1,025
Apple = 25,000 ( 1 – 0.35) – 0.1795 x 1,00,000 = - 1700
c. Since EVA of orange is highest and its WACC is lower, so orange is considered as
best investment
d. Statement of EPS
Orange Grape Apple
EBIT 25,000 25,000 25,000
Interest 12,800 6,500 3,000
EBT 12,200 18,500 22,000
EAT 65% 7930 12,025 14,300
Shares 6100 8300 10,000
EPS 1.3 1.45 1.43
MP EPS X PE 14.3 15.94 15.73
E Market cap(MP x No. of sh) 87,230 1,32,302 1,57,300
Q21 Statement of EBIT
PAT 15 lacs
PBT 15 / 0.6 25 lac
Interest 15 lac
EBIT ( 25 lac + 15 lac) 40 lac
EVA = EBIT (1 – tax rate) - WACC x Total Investment
15
= 40 lac x 0.6 – 0.126 x 100,00,000
= 24,00,000 – 12,60,000
= 11,40,000
Cost of funds of Delta Ltd is 12.6%, i.e on total capital employed of 10,00,000
delta has to yield 12,60,000 to keep its market value unchanged. Thus capital
employed should remain 10,00,000
Company has surplus funds of 11,40,000, which company can use either to
pay dividend to shareholders or can be reivested to increase earnings.
Maxmum dividend co. can pay without affecting existing cap employed and
affecting value of firm is 11,40,000 / 2,50,000 = ₹ 4.56/share
If dividend is not paid additional funds of can be use to earn higher returns
next year
Q22 Surplus cash = 100 lacs
Distributed = 27% of 100 lac = 27 lac
a. Market cap after buyback = No. of shares after Buyback x MP after .
. buyback
210 lac = ( 10,00,000 - 27,00,000
𝑥 ) 1.1x
210 lac = 11 lac x – 29.7 lac
239.7 lac = 11 lac x
X = 21.79
b. No. of shares bought = 27,00,000
21.79 = 1,23,910 shares
c. EPS after buyback = 𝑡𝑜𝑡𝑎𝑙 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠
𝑁𝑜.𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑎𝑓𝑡𝑒𝑟 𝑏𝑢𝑦𝑏𝑎𝑐𝑘
= 10 𝑙𝑎𝑐 𝑋 3
10,00,000−1,23,910 = 3.424
After buyback EPS per share is increased by 0.424/3 = 14.13%
Q23 EVA = EBIT (1 – tax rate) - WACC x Total Investment
Statement of total investment
Working capital 20 lac
Property, plant and equipment 80 lac
Patent rights 40 lac 140 lac
EVA = 12 - (0.15 x 140)
= 9 lac
16
Q24 Same as 21
Q25 same as 10
Q26 Cost of advertisement, benefit of which will last for 3 years has been completely
written off.
Statement of profit
Operating profit 20,20,00,000
+ Advertisement exp of coming 2 years 2,00,00,000
22,20,00,000
Capital invested 84,00,00,000
EVA = EBIT (1 – tax rate) - WACC x Total Investment
= 22,20,00,000 - 84 crore x 0.11
= 22.2 crore – 9.24 crore
= 12.96 crore