# 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-

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  INCOME STATEMENT

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

Â

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  BALANCE SHEET

 Â Â Â Â Â  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)

Â Â Â Â Â Â Â  = 1260-(10.64 % x 1500)

Â Â Â Â Â Â Â  = 1100.4

Calculation of NOPAT

SalesÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  5000

(-) Operating expensesÂ Â  2900

(-) DepreciationÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â  300

EBITÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  1800

(-) tax @ 30%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â 540

NOPATÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  1260

Â

Calculation of WACC

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

Â

kd= I(1-tax)

Â Â Â  = 8 (1-0.3)

Â Â Â  = 5.6

MVA= Market capitalization â€“ Book value of net worth

Â Â Â Â Â Â Â Â  = 2975-900

Â Â Â Â Â Â Â Â  =2075

market capitalization= MPS x no. of shares

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â Â Â Â Â = 59.2 x 50

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  = 2975

P/E ratio= MPS/ EPS

2.5Â Â Â Â Â Â Â Â  = MPS/ 23.8

MPSÂ Â Â Â Â  = 2.5 x 23.8

MPSÂ Â Â Â  = 59.2

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