Answer to Question #222627 in Economics for vinu

Question

 

1. Calculate Economic Value Added (EVA) if the Earnings before Interest and tax is Rs 20, 00,000. The capital structure of the firm consists of Debt-Equity ratio of 2: 3, pretax cost of debt is 14% and the tax rate is 35%. The equity beta is 1.5. The risk free rate of return is 9% and risk premium is 5%. Total borrowed capital of the firm is Rs 45, 00,000. Comment on the value of EVA

Answer 1

$$EVA=EBIT(1-T)-KwC$$

$$Kw=\frac{45,000}{2}\times5=112,500$$

$$EVA=181,750$$