ABC Ltd. Bank has a criterion that it will give loans to companies those have an "Economic Value Added" (EVA) greater than ZERO for the past three years, on an average. The bank is considering lending money to RST Ltd.,

CS Executive · Company Accounts & Auditing Practices · PYQS · December 2020
ABC Ltd. Bank has a criterion that it will give loans to companies those have an "Economic Value Added" (EVA) greater than ZERO for the past three years, on an average. The bank is considering lending money to RST Ltd., as small company, that has the economic value characteristics as shown below: (i) Average net profit after tax is ₹50 lakh for the last three years. (ii) Average total assets over the last three years is ₹150 lakh (iii) Weighted average cost of capital appropriate for the company is 12.5% which is applicable for the three years. (iv) The company's average current liabilities over the last three years is ₹30 lakh. Does the company RST Ltd. meet the Bank's criterion for a positive Economic Value Added (EVA). Justify ?

Answer & Explanation:

Calculation of Economic Value Added Particular Amount (In lakh) Net Operating Profit after Tax 50.00 Less: Cost of Capital Employed (Note 1) (15.00) Economic Value Added 35.00 Economic Value Added is greater than zero therefore, the Company ABC Ltd Qualifies for the loan. Working Note: Average total assets 150.00 Less: Average Current Liability (30.00) Capital Employed 120.00 Cost of Capital employed = Capital Employed * weighted average cost of Capital = 120 * 12.5% = ₹15 Lakh

Topics: Company Accounts

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