- 20 Marks
PM – May 2019 – L2 – Q2 – Divisional Performance Measurement
Discuss the benefits of EVA and calculate it for Tees Nigeria Ltd based on provided financial data.
Question
Peter Drucker opined that “until a business returns a profit that is greater than its cost of capital, it operates at a loss.” Therefore, experts have challenged accounting profit as a good measure of business value increase and proposed economic value added (EVA) as a better measure.
Tees Nigeria Limited has presented the following financial data for the year ended 31 December 2018:
Income Statement 2018:
| Item | ₦000 |
|---|---|
| Profit before interest and tax | 75,000 |
| Interest cost | (9,000) |
| Profit before tax | 66,000 |
| Tax at 30% | (19,800) |
| Profit after tax | 46,200 |
| Dividends paid | (30,000) |
| Retained profit | 16,200 |
Statement of Financial Position 2018:
| Item | ₦000 |
|---|---|
| Non-current assets | 305,000 |
| Net current assets | 190,000 |
| Total assets | 495,000 |
| Shareholders’ funds | 395,000 |
| Long-term debt | 100,000 |
| Capital employed | 495,000 |
Notes:
(i) Capital employed at the beginning of the year was ₦420 million.
(ii) The company had non-capitalised leased assets of ₦24 million.
(iii) The estimated cost of equity was 10%, and the cost of debt was 7%.
(iv) The company’s target capital structure is 60% equity and 40% debt.
(v) Other non-cash expenses were ₦16 million.
(vi) Depreciation is equal to economic depreciation.
Required:
a. Discuss the perceived benefits of using EVA to measure business performance. (10 Marks)
b. Calculate the real economic profit of Tees Nigeria Limited using EVA. (10 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Business performance, Capital Employed, EVA computation, NOPAT, Profit measurement, WACC
- Level: Level 2
- Topic: Divisional Performance Measurement
- Series: MAY 2019