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CA Final · Advanced Financial Management · Financial Policy and Corporate Strategy

Meghna Foods Ltd earns a post-tax operating profit (NOPAT) of Rs 90 crore. Its invested capital is Rs 600 crore and its WACC is 12%. What is the Economic Value Added (EVA) for the year, and what does it indicate?

EVA equals NOPAT minus capital charge. The capital charge is 12 percent of Rs 600 crore, which is Rs 72 crore. EVA is therefore Rs 18 crore positive, showing the firm earns more than its cost of capital and creates shareholder value.

  1. ARs 18 crore; the firm creates value above its cost of capitalCorrect
  2. BRs 72 crore; the firm creates value equal to its profit after capital charge of 12 percent on profit
  3. CRs 18 crore negative; the firm destroys value
  4. DRs 90 crore; capital has no cost in EVA

Explanation

Capital charge = 12% × 600 = Rs 72 crore. EVA = 90 − 72 = Rs 18 crore, positive, so returns exceed the cost of capital. Option three reverses the sign; option four ignores the capital charge.

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