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CMA Final · Strategic Performance Management and Business Valuation · Performance Measurement, Evaluation and Improvement Tools

Nirmaan Ltd has a net operating profit after tax of ₹90 lakh. Its capital employed is ₹600 lakh, funded 40% by debt and 60% by equity. Post-tax cost of debt is 7.5% and cost of equity is 15%. What is its Economic Value Added?

EVA is ₹18 lakh. The weighted average cost of capital is 12%, from 40% debt at 7.5% and 60% equity at 15%. The capital charge on ₹600 lakh is ₹72 lakh, and deducting it from NOPAT of ₹90 lakh leaves ₹18 lakh.

  1. A₹18 lakhCorrect
  2. B₹36 lakh
  3. C₹0
  4. D₹45 lakh

Explanation

WACC = 0.4 x 7.5% + 0.6 x 15% = 3% + 9% = 12%. Capital charge = 12% x 600 = ₹72 lakh. EVA = 90 - 72 = ₹18 lakh. Using only the cost of equity gives a charge of ₹90 lakh and EVA of zero, which ignores the cheaper debt.

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