Constant Engineering Ltd. has developed a high tech product which has reduced the Carbon emission from the burning of the fossil fuel. The product…

CA Final · Advanced Financial Management · MTP · May 2025
Constant Engineering Ltd. has developed a high tech product which has reduced the Carbon emission from the burning of the fossil fuel. The product is in high demand. The product has been patented and has a market value of 100 Crore, which is not recorded in the books. The Net Worth (NW) of Constant Engineering Ltd. is 200 Crore. Long term debt is 400 Crore. The product generates a Net Operating Profit after Tax of 84 Crore. The rate on 365 days Government bond is 10 percent per annum. Market portfolio generates a return of 12 percent per annum. The stock of the company moves in tandem with the market. Calculate Economic Value added of the company.

Suggested Answer and Working Notes:

Total Investments Amount (₹ Crore) Net Worth 200.00 Long Term Debts 400.00 Patent Rights 100.00 Total 700.00 WACC (k o ) = k e × [E / (E+D)] + k d × [D / (E+D)] E = Net Worth + Patent Rights = 200 + 100 = 300 D = Long Term Debts = 400 Total = 700 k e = 12% (as stock moves in tandem with market) k d = 10% (rate on 365 days Government bond) = 12% × [300 / 700] + 10% × [400 / 700] = 5.14% + 5.71% = 10.85% EVA = Profit Earned – WACC x Invested Capital = 84 crore - 10.85% x 700 crore = 8.05 crore

Topics: Business Valuation

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