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CMA Final · Strategic Performance Management and Business Valuation · Economic Efficiency of the Firm - Performance Analysis

Case: Sundaram Auto reports NOPAT of Rs 150 lakh. Its invested capital is Rs 1,000 lakh, financed 60% by equity costing 15% and 40% by post-tax debt costing 7.5%. Which option correctly gives its EVA, and the sound conclusion?

EVA is Rs 30 lakh and value is created. WACC is 12 percent (60 percent at 15 plus 40 percent at 7.5), so the capital charge on Rs 1,000 lakh is Rs 120 lakh, leaving Rs 30 lakh of NOPAT above it.

  1. AEVA Rs 12 lakh; value is created
  2. BEVA Rs 30 lakh; value is createdCorrect
  3. CEVA Rs 150 lakh; value is created
  4. DEVA Rs 0; value is neither created nor destroyed

Explanation

WACC = 0.6 x 15% + 0.4 x 7.5% = 9% + 3% = 12%. Capital charge = 12% x 1,000 = Rs 120 lakh. EVA = 150 - 120 = Rs 30 lakh, positive, so value is created. Check: ROIC 15% exceeds WACC 12% by 3% of 1,000 = 30.

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