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Q--- share capital 2000/- reserve and surplus 4000/- Long term debt 400/- tax rate 30% risk free rate 9% market rate of return 16% interest 40/- beta factor 1.05 PBIT 2000/- compute the economic value added? plz ans it and if possible then also with reason. actually i want to know the logic behind calculation of NOPAT..its urgent |
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Ashish Ojha
(Chartered Accountant)
(469 Points)
Replied 07 November 2009
Workings:
1.operating capital-
Share capital 2000
+Reserves 4000
+Long term Debt 400= 6400
2. NOPAT-
PBIT 2000
(-)non operating income nil
2000
(-) Economic Taxes(30%) 600
NOPAT 1400
3. Weighted Average Cost of capital-
Calculated as 15.7675%,
4. Return on operating Capital-
NOPAT/ Operating Capital * 100= 15.76%
Solution:-
EVA=( Return on operating Cap - WACC ) * Operating Capital
= 39088
the logic behind using Nopat is to include economic cost of capital in our computation. when we deduct economic taxes on amt before interest, we ignore the financing policy of the company & just focus on how effectively it has utilised its fund..
Ashish Ojha
(Chartered Accountant)
(469 Points)
Replied 07 November 2009
yes, but i check it very less, most of the time i m on caclubindia.... my id is ojha.ashish @ rocketmail.com
well i get u but in ur solution return on operating capital would be 21.875% ie 1400/6400*100
but look at this too...FIRST
EBIT 2000
LESS INT. 40
1960
LESS TAX 30% 588
1372
ADD INT (AFTER TAX) 28
NOPAT 1400
SECOND VIEW
EBIT 2000
LESS INT. 40
1960
LESS TAX 30% 588
1372
ADD INT 40
NOPAT 1412
AT THIS POINT I AM CONFUSED...ABT INTEREST...
WHAT IS THE ADJUSTEMENT IF THERE IS ....PBT OR PAT IS GIVEN....
THANX
Ashish Ojha
(Chartered Accountant)
(469 Points)
Replied 08 November 2009
we have nothing to do with interest amt while calculating NOPAT.....
this amt is given to calculate rate of interst, i.e. 10% for the computation of WACC.. thats it
ignore it while calculating NOPAT
madhurima
(article assisstant)
(76 Points)
Replied 29 August 2010
in jks vora sir has done sums as per d second view but sir told us dat suggested has done differently but m followin my sirs method!
CA. Hitesh Garg
(Employed)
(45 Points)
Replied 16 August 2011
Yar Praveen Sharma Sir ne b Interest ko ignore kiya hai, But in the RTP issued by the institute has done the solution as per first view, so that its a topic for confusion. Let me know which view is to be treated correct.
p.vasudev
(xxx)
(110 Points)
Replied 15 September 2011
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Could not understand how the 15.7576% figure was got... How about CAPM approach like: WACC= 9% + 1.05( 16% - 9% ) In that case EVA is negative I suppose.... Originally posted by : Varun Pandey |
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Q--- share capital 2000/- reserve and surplus 4000/- Long term debt 400/- tax rate 30% risk free rate 9% market rate of return 16% interest 40/- beta factor 1.05 PBIT 2000/- compute the economic value added? plz ans it and if possible then also with reason. actually i want to know the logic behind calculation of NOPAT..its urgent |
 |
p.vasudev
(xxx)
(110 Points)
Replied 15 September 2011
|
Could not understand how the 15.7576% figure was got... How about CAPM approach like: WACC= 9% + 1.05( 16% - 9% ) In that case EVA is negative I suppose.... |
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