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Hi all,
I am getting confused with NOPAT calculation. Kindly explain what are the adjustments to be made when i am starting with Earnings before interest and tax. And is it must that EVA should be calculated only with Opening capital
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 = 600,750So: 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
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