STR Ltd.'s current financial year's income statement reported its net income after tax as 50 Crore. Following is the capital structure of STR Ltd.…

CA Final · Advanced Financial Management · MTP · September 2025
STR Ltd.'s current financial year's income statement reported its net income after tax as 50 Crore. Following is the capital structure of STR Ltd. at the end of current financial year: Particulars ₹ Debt (Coupon rate = 11%) 80 Crore Equity (Share Capital + Reserves & Surplus) 250 Crore Invested Capital 330 Crore Following data is given to estimate cost of equity capital: Asset Beta of TSR Ltd. 1.11 Risk-free Rate of Return 8.50% Average market risk premium 9% The applicable corporate income tax rate is 30%. Estimate Economic Value Added (EVA) of RST Ltd. in lakh. Note: Round off all calculations upto two decimal points.

Suggested Answer and Working Notes:

First of all, to calculate Cost of Equity we shall compute the Equity Beta of STR Ltd. as follows: β e = β a [E / (E+D(1-t))] 1.11 = β e [250 / (250+80(1-0.30))] β e = 1.36 then we shall compute the Cost of Equity as per CAPM as follows: k e = R f + β x Market Risk Premium = 8.50% + 1.36 x 9% = 8.50% + 12.24% = 20.74% Cost of Debt (k d ) = 11%(1 – 0.30) = 7.70% WACC (k o ) = k e x [E / (E+D)] + k d x [D / (E+D)] = 20.74 x [250 / 330] + 7.70 x [80 / 330] = 15.71 + 1.87 = 17.58% Taxable Income = 50 Crore/(1 - 0.30) = 7142.86 lakhs Operating Income = Taxable Income + Interest = 7142.86 lakhs + 880 lakhs = 8022.86 lakhs EVA = EBIT (1-Tax Rate) – WACC x Invested Capital = 8022.86 lakhs (1 – 0.30) – 17.58% x 330 Crore = 5616.00 lakhs -5801.40 lakhs = -185.40 lakhs

Topics: Business Valuation

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