Question MCS 2010 Vimal Eneterprises's Profit & Loss A/c for the year 2009-2010 is given below:

Rs in lacs Sales 500 Less: Variable Cost 350 Contribution 150 Less: Fixed Cost 40 Less: Depreciation 30 PBIT 80 Less: Interest 15 PBT 65 Less: Tax @ 40% 26 PAT 39 The company's Balance Sheet is given below: Rs in lacs Equity (20%) 300 Debt (15%) 100 400 1 a b c 2

Fixed Assets Net Working Capital

Rs in lacs 300 100 400

2 a b c 3

Calculate : Return on Equity, and Return on Capital Employed EVA Vimal would like to expand its operations. It would purchase Fixed Assets worth Rs. 100 lacs and invest in working capital of Rs. 100 lacs. Fixed Assets are financed by equity (20%). Working capital is financed by Debt (15%). The Sales will increase by 40%. The ration of Variable cost to selling price will reduce by 5%. The amount of Fixed cost, other than depreciation, will increase by 5%. Depreciation is on Straight Line method. Calculate: ROE and ROCE pre and post expansion Also calculate Total Asset turnover pre and post expansion Pre and Post expansion EVA Has the company done better after expansion? In what way? Solution Vimal Enterprises Sales Variable Cost Contribution Fixed Cost Depreciation PBIT Interest PBT Tax @ 40%

2010-11 Additions Rs in lacs Rs in lacs 500 200 350 70% 150 40 30 10% 80 15 15% 65 40% 26

Post Expansion Rs in lacs 700 65.00% 455 245 42 10% 40 163 15% 30 133 53.2

PAT

39

79.8

Return on Equity PAT Equity Return on Equity Return on Capital Employed PBT Interest EBIT Tax 0.40 NOPAT Capital Employed Return on Capital Employed (ROCE/ROIC) EVA NOPAT WACC Capital Employed WACC*Capital Employed EVA Sales Margin PAT Sales Sales Margin (%) Total Asset Turnover Sales Total Assets Total Asset Turnover

39 300 13.00%

79.8 400 19.95%

65 15 80 32 48 400 12.00%

133 30 163 65.2 97.8 600 16.30%

48 17.25% 400 69 (21)

98 16.33% 600 98 (0)

39 500 7.80%

80 700 11.40%

500 400 1.25

700 600 1.17

ROE, ROCE and EVA figures conclude that the expansion was favourable. Sales margin increased but Asset turnover reduced; however, ROCE has increased

As on March 31, Equity 15% Debt

2011 Additions Post Exp. Rs in lacs Rs in lacs Rs in lacs 300 100 400 100 100 200 400 200 600

Fixed Assets Net Working Capital

300 100 400

100 100 200

400 200 600

WACC Equity (20%) 15% Debt WACC

20% 15%

60 9 69 17.25%

80 18 98 16.33%