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 | ||
|
500 | 33.33 | 14% | 4.67% | ||
|
400 | 26.67 | 14% | 3.73% | ||
|
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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