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

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

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

$$EVA=181,750$$