Economic Value Added (EVA) of ABC Lad was - 31,10,000 Following is the capital structure of ABC Ltd. at the end of current financial year Equity…

CA Final · Advanced Financial Management · PYQS · November 2024
Economic Value Added (EVA) of ABC Lad was - 31,10,000 Following is the capital structure of ABC Ltd. at the end of current financial year Equity (Share Capital + Reserves & Surplus) 170 lakhs Debt (Coupon Rate 10%) 80 lakhs Invested Capital 250 lakhs Following data is given to estimate the cost of equity capital: Beta of ABC Ltd. 0.90 Risk-free rate (i.e., current yield on Govt. Bonds) 8% Average market risk premium 10% Economic Value Added (EVA) of ABC Ltd was - 31,10,000. The applicable corporate income tax rate is 30%. You are required to calculate the Profit After Tax of ABC Ltd.

Suggested Answer and Working Notes:

To compute Profit after Tax (PAT) of ABC Ltd. first we shall compute Cost of Equity, Cost of Debt and WACC as follows: Cost of Equity (k e ) as per CAPM k e = 8% + 0.90 x 10% = 17% Post Tax Cost of Debt (k d ) = 10% (1 – 0.30) = 7.00% WACC = 17% x (170/250) + 7% x (80/250) = 11.56% + 2.24% = 13.80% EVA = Net Operating Profit after Tax (NOPAT) – (Invested Capital × WACC) 31,10,000 = NOPAT – (₹ 2,50,00,000 × 0.1380) NOPAT = 65,60,000 Operating Profit = 65,60,000 / 0.70 = 93,71,429 Calculation of profit after Tax Operating Profit 93,71,429 Less: Interest 8,00,000 Profit before Tax 85,71,429 Less: Tax @ 30% 25,71,429 Profit after Tax 60,00,000

Topics: Business Valuation

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