Question

50,3804, 34) EVAe

Answer 1

Following Information provided to us -

Total Assets (Invested capital) = 50,380

Share of equity in total capital = 55%

Share of Debt in total capital = 45%

Operating income before tax = 17,836

Cost of Equity = 21.4%

pre-tax cost of debt = 16.2%

Tax rate = 34%

a) Weighted average cost of capital(WACC)

$WACC = Share of equity*cost of equity + share of debt*post tax cost of debt$

post-tax cost of debt = pre-tax cost of debt*(1-tax rate)

post-tax cost of debt = 16.2%*(1-0.34)

= 10.692%

WACC = 0.55*21.4% + 0.45*10.692%

= 11.77 + 4.8114

= 16.5814 %

Thus, WACC is 16.5814 %

b) Return on Investment (ROI)

$ROI = \frac{Income after tax}{Invested capital}$

Income after tax = Income before tax*(1-tax) rate

Income after tax = 17,836*0.66

= 11,771.76

ROI = 11,771.76/50,380

= 0.23366

= 23.366%

Thus, ROI is 23.366%

c) Economic value added (EVA)

It is the income after tax in excess of required income of the firm.

thus,

$EVA = Income after tax - [WACC*Capital Invested]$

EVA = 11,771.76 - (0.165814*50,380)

EVA = 11,771.76 - 8,353.71

= 3,418.05

Thus, EVA is 3,418.05

d) Market Value Added (MVA)

It is difference between Market value of Firm (V) and Invested capital (K). It is also equals to the present value of all EVA series i.e PV(EVA)

MVA = PV(EVA)

Assuming EVA calculated above is constant for indefinite period.

MVA = EVA/WACC

= 3,418.05/0.165814

= 20,613.76

Thus, MVA is 20,613.76

e) Estimated Market value of Company

As defined above, MVA is difference of Market value of company(V) and Invested capital (K). So, we can calculate the market value of firm in following manner -

Market value of Firm (V) = MVA + Invested capital

V = 20,613.76 + 50,380

V = 70,993.76

Thus, Market value of company is 70,993.76