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

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

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

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

Special Studies in Finance Practice Problem and Solution for Exam...