Assignment eva and wacc
Assignment No 02
MGT 404
Solution
Operating Profit after Tax = 210,000
Capital employed or investment = 2000,000
Half of the company’s capital has been financed through 10-year loan paying 6 % interest
annually
Half Amount = 1000,000
Loan paying interest rate = 6% annually
Company Premium Rate = 12%
First Of all we Calculated WACC
WACC = 1000,000 X {6%(1.0.35)}+ 1000,000 X 12% / 1000,000 + 1000,000 X 100
WACC = 39000 + 120,000 / 2000,000 X 100
WACC = 7.95 %
A) No Change are made in the given financials, computed EVA
EVA = Net Operating Profit – (Invested capital X WACC)
EVA = 210,000 – (2000,000 X 7.95%)
EVA = 51,000
B) It is felt that replacement of sugar with sucrose will not affect the cost but will raise
the equity premium above long term t-bonds 3 % in the first year and 0% in second
Year. Using the forecast changes, compute the revised EVA for the year 1 and 2
Equity Premium Rise = 3 %
Previous equity premium = 12%
Net equity premium for the first Year = 12% + 3%
Net equity premium for the first Year = 15%
Net equity premium for the second year = 12% + 0%
Net equity premium for the second year = 12%
WACC = 1000,000 X {6% (1-0.35)} + 1000,000 X15% / 1000,000 + 1000,000 X 100
WACC = 39000 + 1500,000 / 2000,000 X 100
WACC = 9.45%
EVA (1st Year) = Net operating Profit – (Investment X WACC)
EVA (1st Year) = 210,000 – (2000,000 X 9.45)
EVA (1st Year) = 21000
EVA (2nd Year) = Net Operating Profit – (Invested capital X WACC)
EVA (2nd Year) = 210,000 – (2000,000 X 7.95%)
EVA (2nd Year) = 51,000
C) The company is considering issuing new equity of Rs= 3,000,000 to finance an
expansion plan. It will increase the total capital employed to Rs= 5,000,000 with
equity portion of 80% thereof. The expansion will also raise the after tax operating
income to Rs 750,000. Using these new financial, compute EVA taking premium of
12%, 9% for year 1 and 6% for year 2
New equity issuing = 3,000,000
Capital employed = 5,000,000
Equity portion = 80%
Operating income = 750,000
Year 1 premium = 12% interest and 9% premium
Year 2 Premium = 12% interest and 6% premium
EVA = Net operating income – (Capital employed X WACC)
EVA = [ 5,000,000 X {12% (1-08)} + 3,000,000 x 9%] / (5,000,000 + 3,000,0000) X 100
WACC = (120,000 + 270,000) / 8,000,000 X 100
WACC (1st Year) = 4.875%
WACC = [5,000,000 X {12% (1-0.80)} + 3,000,000 X 6%] / (5,000,000 + 3,000,000) X 100
WACC = (120,000 + 180,000) / 8,000,000 X 100
WACC (2nd Year) = 3.75%
EVA = Net Operating Profit – (Capital Employed X WACC)
EVA = 750,000 – (5,000,000 X 4.875%)
EVA (1st Year) = 506250
EVA = Net Operating Profit – (Capital Employed X WACC)
EVA = 750,000 – (5,000,000 X 3.75%)
EVA = 750,000 – 187,500
EVA (2nd Year) = 562,500
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