CE Ltd. has earned a net profit of 84 lakhs after tax at 30%. CE Ltd. has developed a high tech product which is in high demand. The product has…

CA Final · Advanced Financial Management · PYQS · January 2026
CE Ltd. has earned a net profit of 84 lakhs after tax at 30%. CE Ltd. has developed a high tech product which is in high demand. The product has been patented and has a market value of 100 Lakhs, which is not recorded in the books. The Net Worth of CE Ltd. is 200 Lakhs. Long Term Debt is 400 Lakhs. The rate on 365 days Government bond is 10% p.a. Market portfolio generates a return of 14% p.a. The stock of the company moves in tandem with the market. Required: (i) Compute the operating income (ii) Compute EVA (iii) CE Ltd. has 7 lakh equity shares outstanding. Based on the EVA computed in (ii), how much dividend per share can CE Ltd. pay before the value of the company starts to decline?

Suggested Answer and Working Notes:

EVA = Operating Income – (Cost of Capital x Total Investment) Total Investments Amount (₹ Lakhs) Net Worth 200.00 Long Term Debts 400.00 Patent Rights 100.00 Total 700.00 WACC = 14% × (300/700) + 10% (1-0.30) × (400/700) = 6% + 4% = 10% Taxable Income = 84 Lakhs/ (1 – 0.30) = 120 lakhs Operating Income = Taxable Income + Interest = 120 Lakhs + (400Lakhs x 10%) = 120 Lakhs + 40 Lakhs = 160 Lakhs EVA = 160 Lakhs (1 – 0.30) – 10% x 700 Lakhs = 42 Lakhs Maximum Dividend = 42 Lakhs/7,00,000 = 6.00

Topics: Business Valuation

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