Archive / Investment Adviser (Level 1) / Investing in Stocks

nism-series-xa-economic-value-added-eva-calculation-example[ INVESTMENT ADVISER (LEVEL 1) ]

Titan Company reports Earnings Before Interest and Taxes (EBIT) of ₹3,000 Crore, an effective corporate tax rate of 25%, Total Capital Employed (Debt + Equity) of ₹12,000 Crore, and a Weighted Average Cost of Capital (WACC) of 11.0%. What is Titan's Economic Value Added (EVA)?

[ A ]₹930 Crore[ CORRECT ]

[ B ]₹1,680 Crore

[ C ]₹2,250 Crore

[ D ]₹650 Crore

Takeaway

EVA = NOPAT - (Capital Employed * WACC) = ₹2,250 Cr - ₹1,320 Cr = ₹930 Crore.

Derivation

Net Operating Profit After Tax = EBIT × (1 − tax rate) = ₹3,000 Cr × (1 − 0.25) = ₹2,250 Crore. The Cost of Capital Charge is what the company must earn just to compensate its debt and equity investors for the capital they've committed: ₹12,000 Cr × 11.0% = ₹1,320 Crore. Economic Value Added is the residual after covering that charge: ₹2,250 Cr − ₹1,320 Cr = +₹930 Crore. Unlike accounting profit, EVA explicitly charges for equity capital, not just interest-bearing debt, which is why a company can report a healthy net profit and still destroy economic value if that profit doesn't clear its full cost of capital hurdle.

Why the others fail

B — ₹1,680 Crore

Subtracts a raw interest cost figure directly instead of computing the capital charge as Capital Employed multiplied by WACC across the whole capital base.

C — ₹2,250 Crore

Reports NOPAT of ₹2,250 Crore alone without deducting the ₹1,320 Crore capital charge, which is the entire point of the EVA calculation.

D — ₹650 Crore

Applies an unadjusted 20% rate for the capital charge instead of the stated 11.0% WACC, producing a capital charge far removed from the correct ₹1,320 Crore.