NOPAT and EVATM

EVA always uses openting capital employed. Many of the adjustments to get to NOPAT are the same whether or no you start with profit after tax or before tax. For example, in both you usually add back R&D expenditure and deduct economic depreciation rather than book depreciation. If you start with earnings before tax, you have to deduct the tax on those earnings (you do not deduct interest or adjust for any tax relief on the interest because NOPAT is before interest). If you start with earnings after tax, then this must also be after interest and tax relief on interest have been deducted. You have to add back the interest net of tax to get to NOPAT.

Hello Mr. Ken, There is an adjustment in the calculation of NOPAT that i do not understand. I am referring to the question on Cantor June 2014 Number 1(iii). I do not understand the reasoning behind the tax relief on interest. Can you explain this to me please. Thank you in advance.

NOPAT is before interest, but after tax. If the P&L is: operating profit 100 - interest 30 = 70, less tax at 20% (say) 14 =PAT = 56 To get to NOPAT, you could do: 100 less 20% = 80 Or: operating profit 100 - tax paid 14 less tax relief on interest now lost 30 x 20% = 80 It is simply recognising that the tax paid (14) is less than it would have been if there had been no interest.

Sir can you also explain how they calculated Waac in this question as its bit different to other Qs.thanks

Debt to equity is 30% eg MVd = 30 and MVe = 100 WACC = 15.7 x 100/(30 + 100) + 6.5(1 - 0.25) x 30/(30 + 100) = 13.2%

Thank you but there is one more problem if i take PAT for calculation i am not getting right answer as if you take operating profit. Can you plz show me the adjustments using PAT... many thanks

PAT = 7,538,977 Add finance net of tax relief 801,000 - 25% x 801,000 = 600,750 So: 7,538,977 + 600, 750 = 8,139,727 Add 50% of marketing: 8,139,827 + 0.5 x 7,638,000 = 11,958,827 This includes a deduction for the tax charge, but it is the tax PAID that should be deducted instead: PAT = 11,958,827 + 2,512,993 - 2,100,000 = 12,371,820

Thank you sir but i think my question was not straight enough, i can do this way but how can i do it if i take PAT and work backward as some of adjustment i cant understand. Thanks

I have taken PAT and worked backwards.

Got it . Thank you very much sir