Special Studies in Finance Practice Problem and Solution for Exam # 2


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The income statement and balance sheet of Alpha Company Ltd. is given below-

                                                    INCOME STATEMENT

PARTICULARS Rs (in Lakhs) Rs (in lakhs)
Sales 5,000  
Interst on investment 100  
Profit on sale on old assets 50  
Total income   5,150
Less    
Manufacturing cost 1,800  
Administration cost 600  
Selling and distribution cost 500  
Depreciation 300  
Loss on sale of an old building 50 3,250
EBIT   1,900
Less– interest   200
EBT   1,700
Less– tax (30%)   510
PAT   1,190
EPS [1,190 lakhs/ 50 lakhs]   Rs. 23.8
P/E ratio   2.5

 

                                                    BALANCE SHEET

      LIABILITIES Rs. ASSETS Rs.
Equity capital (Rs 10 shares) 500 Buildings 800
Retained profits 400 machinery 700
Term loan 600 Stock 100
Payable 150 Debtors 120
Provisions 130 Bank 60
TOTAL 1,780 TOTAL 1,780

 

The cost of equity and cost of debt is 14% and 8% respectively. The company pays 30% corporate tax.

From the information given you are require to calculate the EVA. Also, calculate MVA on the basis of market value of equity capital.

Solution

EVA= NOPAT-(WACC- CE)

        = 1260-(10.64 % x 1500)

        = 1100.4

Calculation of NOPAT

Sales                              5000

(-) Operating expenses   2900

(-) Depreciation                300

EBIT                              1800

(-) tax @ 30%                    540

NOPAT                           1260

 

Calculation of WACC

Sources Amt. Proportion Cost WACC
  1. equity cap.
500 33.33 14% 4.67%
  1. Retained
400 26.67 14% 3.73%
  1. Term loan
600 40.00 5.6% 2.24%
  1500 100   10.64%

 

kd= I(1-tax)

    = 8 (1-0.3)

    = 5.6

MVA= Market capitalization – Book value of net worth

         = 2975-900

         =2075

market capitalization= MPS x no. of shares

                                 = 59.2 x 50

                                 = 2975

P/E ratio= MPS/ EPS

2.5         = MPS/ 23.8

MPS      = 2.5 x 23.8

MPS     = 59.2

 

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