CA Final · Advanced Financial Management · Business Valuation
Narmada Foods Ltd has NOPAT of Rs 60 crore, capital employed of Rs 400 crore and WACC of 12%. EVA is expected to remain constant forever. Using the EVA approach, what is the MVA, i.e., the present value of future EVAs?
MVA is Rs 100 crore. Annual EVA is NOPAT of Rs 60 crore less a Rs 48 crore capital charge, giving Rs 12 crore. Capitalising this constant perpetual EVA at the 12% WACC gives the present value of future EVAs.
- ARs 100 croreCorrect
- BRs 500 crore
- CRs 12 crore
- DRs 400 crore
Explanation
Capital charge = 12% x 400 = 48. EVA = 60 - 48 = Rs 12 crore. MVA = perpetuity of EVA = 12 / 0.12 = Rs 100 crore. Rs 500 crore wrongly adds capital employed to MVA, giving the firm value rather than MVA.
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