The following data pertains to HPS Inc. engaged in software consultancy business as on 31 December 2023: ($ Million) $ Million Income from…

CA Final · Advanced Financial Management · MTP · November 2024
The following data pertains to HPS Inc. engaged in software consultancy business as on 31 December 2023: ($ Million) $ Million Income from consultancy 1870.00 EBIT 360.00 Less: Interest on Loan 36.00 EBT 324.00 Tax @ 35% 113.40 210.60 Balance Sheet ($ Million) Liabilities Amount Assets Amount Equity Stock (20 million share @ $ 10 each) 200 Land and Building 400 Computers & Softwares 590 Reserves & Surplus 650 Current Assets: Loans 360 Debtors 300 Current Liabilities 360 Bank 200 Cash 80 1570 580 1570 With the above information and following assumption you are required to compute (i) Economic Value Added (ii) Market Value Added. Assuming that: (1) WACC is 12%. (2) The share of company currently quoted at $ 50 each.

Suggested Answer and Working Notes:

(i) Determination of Economic Value Added (EVA) $ Million EBIT 360.00 Less: Taxes @ 35% 126.00 Net Operating Profit after Tax 234.00 Less: Cost of Capital Employed [W. No.1] 145.20 Economic Value Added 88.80 (ii) Determination of Market Value Added (MVA) $ Million Market value of Equity Stock [W. No. 2] 1000 Equity Fund [W. No. 3] 850 Market Value Added 150 Working Notes: (1) Total Capital Employed Equity Stock $ 200 Million Reserves and Surplus $ 650 Million Loan $ 360 Million $ 1210 Million WACC 12% Cost of Capital employed $ 1210 Million x 12% $ 145.20 Million (2) Market Price per equity share (A) $ 50 No. of equity share outstanding (B) 20 Million Market value of equity stock (A) x (B) $ 1000 Million (3) Equity Fund Equity Stock $ 200 Million Reserves & Surplus $ 650 Million $ 850 Million

Topics: Business Valuation

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