P R A V I N M A N D O R A G R O U P T U I T I O N S

EVA

EVA : Economic Value Added :

EVA implies the difference between operating profits after taxes & total cost of funds. It is
based on past performance of company.

The underlying economic principle in this method is to determine whether the firm is earning a
higher rate of return on the entire invested funds than the cost of such funds (measured in
terms of WACC). If the answer is positive, the company is adding value to the shareholders
wealth.

How to calculate EVA ?

As WACC takes care of all financial costs of all sources of finance, it is necessary that we should
take operating profits after tax & not net profit after taxes in calculating EVA. The accounting
profit (PAT) needs adjustments for interest costs.

EVA = [Net Operating profits after tax] [Total capital x WACC]

SUMS :

1. Calculate EVA
Sales : 100
Less: COGS 40
Administration exp 4
Selling exp 16
Interest 10 70
PBT 30
Less : Tax (40%) 12
PAT 18

The WACC is 12% (consisting of equity & debt of Rs.150 crore). Cost of equity capital is 15%.

Solution :

PBIT = PBT + Interest = 30 + 10 = 40

NOPAT = PBIT (1-t) = 40 (1- 0.40) = 24
EVA = [Net Operating profits after tax] [Total capital x WACC]
EVA = 24 [150x12%] = 24 18 = 6

PRAVIN MANDORA MOB : 98258 14701 93757 14701

M.B.A (FINANCE) , I.C.W.A (INTER)
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