CA Final · Advanced Financial Management · Business Valuation
Arjun Engineering Ltd expects EVA of ₹20 crore next year, growing at 5% a year in perpetuity. Its WACC is 13% and its invested capital is ₹400 crore. Using the EVA-based valuation, what is the firm value?
Firm value is ₹650 crore. The present value of the growing EVA stream is 20 divided by (13% − 5%), which is ₹250 crore of MVA. Adding this to the invested capital of ₹400 crore gives the total value.
- A₹250 crore
- B₹650 croreCorrect
- C₹400 crore
- D₹154 crore
Explanation
MVA = EVA1/(WACC − g) = 20/(0.13 − 0.05) = ₹250 crore. Firm value = invested capital + MVA = 400 + 250 = ₹650 crore. ₹250 crore is only the MVA; ₹154 crore wrongly divides by WACC alone.
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