Weighted Average Return explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The customer base is discounted at 19 per cent while the business costs 15 — and the four-point gap is not an error.
The facts
AUDAX Club Parisian organises cycling events of 200 km, 300 km, 400 km and 600 km. One who completed these events within limited time gets a super Cyclist title and a medal. In India Audax India Randonneurs is the sole franchisee for organising these events. Varun Fitness Limited is a sports equipment and training company. It sells high end cycles for these events ranging from Rs 1 lakh to Rs 5 lakh. It also provides trainings and gives tips and tricks to become a pro-cyclist.
| Input | Value |
|---|---|
| Sales for FY 2022 | 359 crore |
| EBIT margin | 14% |
| Estimated life of customer relationship | 4 years |
| Weighted average return on assets | 19% per annum |
| Weighted average cost of capital | 15% per annum |
| Income tax rate | 26% |
| Attrition rate | 15% pa |
| Contributory asset charge — fixed assets | 1.4% of sale |
| Contributory asset charge — intangibles (brand, non-compete, assembled workforce) | 3% of sale |
Net available earnings
| Particulars | 2023 | 2024 | 2025 | 2026 |
|---|---|---|---|---|
| Sales post attrition @ 15% | 305.15 | 259.38 | 220.47 | 187.40 |
| EBIT @ 14% | 42.72 | 36.31 | 30.87 | 26.24 |
| Tax @ 26% | 11.11 | 9.44 | 8.03 | 6.82 |
| EAT | 31.61 | 26.87 | 22.84 | 19.42 |
Fair value before TAB
| Particulars | 2023 | 2024 | 2025 | 2026 |
|---|---|---|---|---|
| EAT | 31.61 | 26.87 | 22.84 | 19.42 |
| CAC — tangible assets (1.4% of sale) | 4.27 | 3.63 | 3.09 | 2.62 |
| CAC — intangible assets (3% of sale) | 9.15 | 7.78 | 6.61 | 5.62 |
| Total contributory asset charge | 13.43 | 11.41 | 9.70 | 8.25 |
| Excess earning of customer relationships | 18.19 | 15.46 | 13.14 | 11.17 |
| PV factor @ 19% | 0.84 | 0.71 | 0.59 | 0.5 |
| Present value | 15.28 | 10.92 | 7.80 | 5.57 |
Fair value of customer relationship: 39.57 crore, and at a TAB factor of 1.207, 47.76 crore after the tax amortisation benefit.
Two rates are given and only one is used. The discounting is done at 19%, the weighted average return on assets, while the weighted average cost of capital of 15% appears nowhere in the computation.
That is deliberate. WACC is the return the business as a whole must earn, blending low-risk tangible assets with high-risk intangibles. The customer relationship is one of the risky components, so its own required return sits above the blend — consistent with the rule that generally intangible assets have relatively more risk associated than tangible assets, a group of assets or business as a whole.
The 400 basis point premium is the price of that risk, and it costs the valuation real money: at 15 per cent the same excess earnings would be worth roughly 42 crore rather than 39.57.
Note the second feature — the split contributory asset charge. Fixed assets are charged at 1.4% of sales and intangibles at 3%, and the difference reflects that the rate of return will depend on the nature of asset. A single blended charge would misprice both.
Note also what sits inside the 3 per cent: brand, non-compete agreement and assembled workforce. The workforce is charged even though it can never be recognised as an asset — the point the Standard makes when it lists assembled workforce among contributory assets while denying it recognition.
Finally, the charges together take about 42 per cent of earnings after tax in every year. The customer relationship keeps the rest, which is the whole discipline of the method.
The attrition line
Sales fall from 359 to 305.15, 259.38, 220.47 and 187.40 — a constant 15 per cent of the surviving base each year, not of the original. Note that year 2022 itself carries no earnings: it is the base year, and the asset's cash flows begin in 2023 under the end of year convention the company follows.
Common mistakes
- Discounting an intangible at the entity's weighted average cost of capital.
- Blending the tangible and intangible contributory charges into one rate.
- Excluding the assembled workforce from contributory charges.
- Applying attrition to the original sales base each year.