Contemporary Business Studies - Academy of Knowledge Process ...

International Journal of Contemporary Business Studies
Vol: 3, No: 1. January, 2012 ISSN 2156-7506
Available online at http://www.akpinsight.webs.com
enjoys tax shield. In other words, tax reduces the effective cost of debt. Cost of debt can be calculated by
applying the following formula:
Cost of Debt = (Total Interest Expense / Beginning Total Borrowings) × (1−t) × 100
Calculation of Cost of Equity (Ke):
11 The cost of equity can be calculated by the Capital Asset Pricing Model (CAPM). The CAPM is
normally used to determine minimum required rates of return from investment in risky assets. Stewart
also used CAPM consistently as a measure for cost of equity in his methodology for computing EVA.
The expected return on equity can be calculated under CAPM by applying the formula given below:
Rj = Rf + b (Rm − Rf )
Where Rj = Expected Return on Scrip j,
Rf = Risk free rate of return,
b = Beta representing the volatility of scrip j against market volatility.
Rm = Expected stock market return.
4.2 EVA Calculation for Indian Private Sector banks
(A) Net Operating Profit after Tax
The NOPAT curriculum includes Interest Income, other Income deducting interest on deposit and other
operating expenses less tax so as to give an overall emphasis for operating profit. Net operating profit is
considered instead of net profit so as to highlight the economic value of a firm.
NOPAT = (Net Profit + Provisions and contingencies + Interest expenses) less (Taxes)
TABLE 1. Net Operating Profit after Tax
Name of Banks 2005 2006 2007 2008 2009 2010
Axis Bank 1528.63 2407.7 3744.13 5931.5 9569.91 10031.17
HDFC Bank 2324.64 3531.09 5310.62 8132.99 13515.93 12835.84
ICICI Bank 10075.89 15320.2 23807.43 32622.84 31516.36 25956.79
ING Vyasya Bank 929.3 997.37 1095.66 1459.83 2002.28 1963.11
Induslnd Bank 1090.08 1103.85 1449.51 1758.64 2173.62 2314.9
Karnataka Bank 705.37 864.7 1052.84 1331.3 1681.31 2037.12
Kotak Bank 274.64 513.45 933.98 1845.28 2142.25 2318.91
Above table shows NOPAT of various banks over a period of time. Among all studied banks, it was
found that in year 2010, ICICI bank has maximum NOPAT. HDFC bank again has NOPAT of
Rs.12835.84 & it stood on second position among all banks. NOPAT of Kotak Mahindra bank was grown
with 213.34% from year 2005 to 2010. The NOPAT of Axis bank was grown at 188.13 % over a period.
NOPAT of HDFC bank & Karnataka bank was grown at rate of 170.87% & 106.06%, respectively. ICICI
bank & indusland bank has recorded a growth rate in NOPAT at rate of 94.63% & 75.31%, respectively.
NOPAT of ING Vyasya bank was grown at lowest growth rate of 74.79%.
TABLE 2. Invested Capital (In Rs.)
Invested Capital Mar 2005 Mar 2006 Mar 2007 Mar 2008 Mar2009 Mar 2010
Axis Bank 4189.6 5553.11 8588.83 14392.54 25734.67 33214.16
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