SOLVED MGT201 GDB 1 Solution and Discussion

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Analysis of financial Statements…

Opening Date Nov 18, 2019

Closing Date Nov 22, 2019

Discussion topic: Analysis of Financial Statements

Discussion Question:

A fresh graduate from a well-recognized university got a job as a financial analyst in a reputed firm whose responsibility is to forecast and provide an opinion to its valued customers about future and recent investment. The finance manager of the firm wants to ascertain knowledge of the graduate and provided a project for valuation of two companies like Company A and Company B. The main motive of the project is to check the management effectiveness for shareholders’ wealth maximization.

In the past, management valued the decisions about managerial effectiveness for wealth maximization on the basis of Economic Value Added (EVA). Therefore, the graduate focuses EVA because EVA is better to measure managerial effectiveness. The management of the firm provided following information of two startup ventures to graduate

	Company A	Company B
Current stock price (in Rs.)	12.5	18
Total assets (in Rs.)	30,000,000	50,000,000
Total liabilities (in Rs.)	20,000,000	35,000,000
Interest (in Rs.)	700,000	800,000
Tax (in Rs.)	780,000	690,000
NET INCOME (in Rs.)	1,820,000	1,610,000
Cost of Capital (in Rs.)	900,000	1,100,000
Outstanding share (No)	1,200,000	1,100,000

Requirements:
Calculate Economic Valued Added (EVA) of both Companies.
Based on the calculations, which company will you suggest for investment and why? (Your selection should be supported with logical reasoning)
Note: Complete Calculations for EVA are mandatory; marks will be deducted on providing just answers).

Important Instructions:

Post your GDB comments (answer) against GDB # 01 rather than against lessons’ MDB.
Your discussion must be based on logical facts.
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For Detailed Instructions, please read the GDB # 01 announcement.

Best of Luck!!

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@zareen

[zareen]

1. Calculate Economic Valued Added (EVA) of both Companies.

	Company A	Company B
Economic Value added (EVA)	EVA = EBIT- cost of capital EBIT,= Net income+ Interest+ Tax EBIT=,1,820,000+700,000+780,000, EBIT,= 3,300,000, EVA,= EBIT – Cost of capital, EVA =,3,300,000 - 900,000, EVA for company A = 2,400,000	EVA = EBIT- cost of capital EBIT = Net income+ Interest+ Tax EBIT= 1,610,000+800,000+690,000 EBIT,= 3,100,000, EVA,= EBIT – Cost of capital, EVA = 3,100,000 - 1,100,000, EVA for company B = 2,000,000

2. Based on the calculations, which company will you suggest for investment and why? (Your selection should be supported with logical reasoning)
   Based on the above calculations, I will suggest Company A for investment. Because higher the Economic value added (EVA), higher will be the market value of the company. Which means Company A will maximize the shareholders wealth than company B, which is the basic objective of the investment to be made.

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[zareen]

@zareen said in MGT201 GDB 1 Solution and Discussion:

Calculate Economic Valued Added (EVA) of both Companies.

EVA adopts almost the same form as residual income and can be expressed as follows:

EVA = NOPAT – (WACC * capital invested)

Where NOPAT = Net Operating Profits After Tax

WACC = Weighted Average Cost of Capital

Capital invested = Equity + long-term debt at the beginning of the period

and (WACC* capital invested) is also known as finance charge