Professional Documents
Culture Documents
Q1
Valuation of business
Net assets method Mkt. value of assets Mkt value of liabilities
STATEMENT OF NET ASSETS
Land and building
Plant and Machinery
Investments
Stock
Debtors
Cash and bank
Creditors
Net Assets
No. of shares
NAV per share
96
100
10
20
15
5
(30)
216
10
21.6
33.6
0.15
224
Total value of shares = value as per operating assets + non operating assets
224 + 10 (investments)
=
234
234
10
= 23.4
23.4
+ 21.6
2
= 22.5
Q2
b.
PAT
PBT
Extrordinary income
Extraordinary exp
Income of new project
FMP before tax
Tax 35 %
FMP after tax
65
100
(10)
3
27
120
42
78
Value of business
78
0.15
FMP
Pref dividend
Profir for equity
No. of shares
EPS
MP
Q3
= 520
78
(11)
67 lac
40 lac
67
= 1.675
40
= EPS X PE
=
1.675 x 8
=
13.4
Q4
40 / sh
1300 crore
1300 / 40
=
290 crore
290 / 32.5
=
=
=
=
=
=
= RF + E (RM - RF)
Ke
=
=
Q5
1
0.5615 (1.08)
0.0886 0.08
= 70.51 / sh
125
50
100
300
25
assets
1.1
(sales / assets)
600
600 x 1.1 = 660
10% of 660 = 66
Income statement
66
EBIT
PAT
Interest
8% of 200
Profit for equity share holders
b. G = b.r
Retention ratio = b
R = Roe
= ( 1 d/p ratio)
= ( 1 0.1667)
= 0.8333
+ &
23.60
100+300
=
G
39.60
16
23.60
5.9%
=
=
0.8333 x 5.9
4.91%
600
c.
P0
0.15 0.049
= 4.09
= WEKE + W DKD
= 0.5 x 20.12 + 0.5 x 9.1
= 14.6
Overall cost of capital from 5th year
Ke
= RF + E (RM - RF)
= 9 + 1(8.8)
= 17.8
Kd
= 12.86 ( 1 0.3)
WACC
= WEKE + W DKD
= 3/5 x 17.8 + 2/5 x 9.002
= 14.28%
4
622
435
415
581
173
96
5
684
479
104
375
Cash flow
factor
PV
56
0.873
49
67
0.761
51
81
0.664
54
96
0.580
56
375
0.1428 0.10
= 8761 0.580
5082
5292
Q7
Analysis
a. This ques requires to ascertain Value of company or firm but further ask to
determine MP of share is correct or not.
Value of co = Value of equity + value of debt
From value of firm we vl deduct value of debt to get value of equity
b. Current value of firm is present value of all future free cash flows
But while computing value of firm we assume debt is not repaid i.e debt equity
ratio is maintained. However this ques mentions 30% debt is repaid in
2014(5th yr). it will be taken as normal cash outflow in 5th year and from 2015
ie 6 th year debt equity ratio will change so will WACC.
245 lac
218.125 lac
26.875 lac
17.20 lac
9.675 lac
9.675/26.875 = 36%
218.125
1934
= 11.28%
Statement of WACC
WACC till 2014
=
=
WACC from 2015
=
WEKE + W DKD
75 66
x 16 +
4650 +1934
13.54%
=
WEKE + W DKD
5
1934
4650+1934
x 11.28(1-0.36)
75 66
4650 +1353.8
14.42%
x 16
1934
4650+1353.8
x 11.28(1-0.36)
EBIT
PAT
Inc in Working cap
Debt repayment
FCFF
13
333.32
213.32
4.43
208.89
14
360
230.39
4.79
580.2
-354.6
Cash flows
165.824
179.09
193.41
208.89
-354.6
240.336
0.1442 0.06
Factor
0.8807
0.7757
0.6832
0.6017
0.53
0.53
PV
146.10
138.97
132.10
125.75
-187.93
1512.735
867.725
Value of equity
=
=
=
6.852
02
500(1.09)
= 545
190.75
354.25
200(1.09)
= 218
218(1.09)
= 237.62
237.62(1.09)
= 259
300(1.09)
= 327
327(1.09)
= 356.43
7000(1.09)2
(0.2)-1526
7000(1.09)3
(0.2)-1663.4
= 137.34
= 149.6
= 163.17
= 177.86
= 86.17
129.95
141.74
154.39
168.27
433.83
Less Ch in WC 7000(1.09)
(0.2)-1400
= 126
FCFF
119.25
259(1.09) 282.31(1.09)
= 282.31
= 307.72
7000(1.09)4
(0.2)-1813.04
CE = Depn
CE = Depn
7000(1.09)5 7000(1.09)5(1.04)
(0.2)- 1976.21 (0.2) 2154.07
= WEKE + W DKD
= 0.5 x 13.6 + 0.5 x 0.10(1 0.35)
= 10.05%
Overall cost of capital from 2007
Ke
= RF + E (RM - RF)
= 7 + 1(5.5)
= 12.5
Kd
= 9%
WACC
= WEKE + W DKD
= 0.75 x 12.5 + 0.25 x 0.10(1 0.35)
= 11%
Value of firm = PV of all future free cash flow of firm.
Year
1
2
3
4
5
65
FCFF
119.25
129.95
141.74
154.39
168.27
PV
108.40
107.34
106.31
105.14
104.16
0.619
3836.30
4367.65
433.83
0.110.04
= 6197.57
Q10
Factor
0.909
0.826
0.750
0.681
0.619
=
=
=
750lac =
WACC =
30
0.05
30
+ 0.05
750
= 9%
WACC
9
X
= WEKE + W DKD
= x (12) + (1-x) 6
=
0.5
7
750 lac
30 lac
5%
=
Po
30
=
Q11
a.
d0
EPS
MP
=
=
=
8.5
27.50
210.20
8.5 ( 1.075)
0.125 0.075
182.75
182.75
545.45
g = 7.5%
RF = 12.5%
BV = 130.55
0.105 0.05
Po
b.
10.5
= 1.40
130.55
210.20
130.55
= 1.61
0
1.4
1.4(0.05)
(1)(1+)
27.5 8.5
27.5
= 0.691
(10.691)(1+0.075)
0.125 0.075
ROE x 0.3322
0.2107
1.61
(1)(1+)
(10.691)(1+0.075)
0.125 0.075
ROE
0.2423
x 100 = 15%
0.2107
Q12
a.
Statement of PV of FCFF
Year
1
2
3
4
5
FCFF
213(1.15) = 245
245(1.15) = 281.75
281.75(1.15) = 324.01
324.01 (1.15) = 372.61
372.61(1.15) = 428.50
428.5 (1.05)
65
0.090.05
= 11,248.13
Factor
0.917
0.842
0.772
0.708
0.650
PV
224.665
237.23
250.14
263.81
278.53
0.650
7311.29
8565.665
b.
Q13
a.
value of firm
=
PV of FCFF
(PV of operating profit)
=
8575 + 650
=
9225
+
PV of non operating profit
(PV of future intt from market sec)
Value of firm
9225
VE
=
=
=
=
Ke
= RF + E (RM - RF)
= 6.25 + 1.05 (5.5)
= 12.025
Po
=
=
b.
Value of equity
VE + 2600
9225 2600
6625
Value of debt
1
1.7 ( 1+0.07)
0.12025 0.07
= 36.20
)( CE depn + ch in WC)
= 3.20 ( 1 = 3.2 (
1600
) (0.78125)
= 2.55 / share
Value per shar =
=
1
2.55 (1.07)
0.12025 0.07
2.7285
0.05025
475
350
) ( 160 - 160 )
c.
Q14
under a dividend discount model, future dividends payable to equity are capitalized to
determine current market price i.e total earning or EPS is not discounted for
determination of Market price.
Under FCFE method total cash flow available for equity is discounted to determine
current market price.
Market price according to FCFE shall be considered as a benchmark to compare with
actual market price.
P0
=
38.5
EPS
=
1.36
DPS
=
0.64
PE
=
28.3
Price/BV
=
7.1
Price/sales
=
2.9
ROE
=
27%
Profit margin on sales
Rf
Rm Rf
=
=
=
=
10.9%
4.9%
5.5%
1.2
a. According to CAPM
Required return on equity
= RF + (RM - RF)
= 4.9 + 1.2 ( 5.5%)
= 11.5%
b. g = 9%
PE ratio
=
=
=
=
=
P/B ratio
=
=
( 0 )
Po
( 1+)(1)
( 1+0.09)( 0.47)
0.115 0.09
20.49
(1)(1+)
0.27 ( 0.47)(1.09)
5.53
10
0 ( 1+)(1)
0.115 0.09
EPS = 1.36
Div = 0.64
D/P ratio (1-b)=
0.64
1.36
0.47
P/S ratio
=
=
=
=
=
b.
PE ratio
PB ratio
P/S ratio
0 ( 1+)(1)
( 1+)(1)
( 1+)(1)
0.109 (1.09)(0.47)
0.115 0.09
0.05584
0.025
= 2.2336
Statement of evaluation
existing
Required
28.3
20.49
existing > required = under
7.10
5.53
existing > required = under
2.90
2.2336 existing > required = under
Balance sheet
2002 2003
200 1080
Fixed assets
140
Stock
360
Debtors
200
Cash / Bank
120 144
80
96
1100 1320
Amount of finance =
=
=
Revised sales value =
For 2003
Profit for 2003
=
Dividend
=
Retention
=
2002
500
300
240
60
2003
600
360
288
72
1100 1320
11
28.80
14.40
1.33
Revised ST loan
Additional ST loan =
144+96+
301.35
Revised Existing
301.35 200
101.35
600
Revised LT loan
Additional LT loan
External finance
. + .
360 +288+72
1.5
1.5
400
=
=
=
Revised - Existing
400 360
40
165.60
=
Q17
24.25
360 +40
200+140+14.4+24.25
400
378.65
= 1.05
Sales
Less : COGS
EBIT
Tax
Free cash flow
12
Alpha
Beta
96,000
72,000
24,000
9600
14,400
48,000
28,800
19,200
7680
11,520
alpha
14,400 (1.04)
0.10 0.04
Beta
11,520 (1.06)
0.120.06
= 2,49,600
= 2,03,520
4,53,120
Value of firm with synergy effect on combining the two firms, the cost of goods
sold is reduced from 70% to 65% of sales.
sales of combined firm
Cost of goods sold
= Rs 96,000 + Rs 48,000 =
= Rs 1,44,000 x 0.65
=
0.10 x
2,49,600
4,53,120
Rs 1,44,000
Rs 93,600
2,03,520
Sales
COGS
EBIT
G
Cost of cap
Free cash flow EBIT x (1 0.4)
Q19
Financial leverage
1.4
1.4
25,920 (1.05)
0.110.05
30,240 (1.05)
0.11 0.05
1.4
EBIT
= 1.4 EBIT - 1.4 x 40
0.4 EBIT = 56
EBIT
= 140
WACC
= WEKE + W DKD
170 + 130
400
= 300 + 400 17.5 + 700 x 10 (1 0.3)
= 11.5
13
EVA
Q20
c.
140lac (1 0.3) -
17.5 lac
WACC
WEKE + W DKD
Orange
13.52
Grape
15.225%
Apple
17.95%
EVA
Orange
2,730
Grape
1,025
Apple
- 1700
Since EVA of orange is highest and its WACC is lower, so orange is considered as
best investment
d.
Statement of EPS
Orange
Grape
Apple
EBIT
25,000
25,000
25,000
Interest
12,800
6,500
3,000
EBT
12,200
18,500
22,000
EAT 65%
7930
12,025
14,300
Shares
6100
8300
10,000
EPS
1.3
1.45
1.43
14.3
15.94
15.73
1,32,302
1,57,300
MP
E
EPS X PE
Q21
Statement of EBIT
PAT
PBT 15 / 0.6
Interest
EBIT ( 25 lac + 15 lac)
EVA
15 lacs
25 lac
15 lac
40 lac
=
=
=
Cost of funds of Delta Ltd is 12.6%, i.e on total capital employed of 10,00,000
delta has to yield 12,60,000 to keep its market value unchanged. Thus capital
employed should remain 10,00,000
Company has surplus funds of 11,40,000, which company can use either to
pay dividend to shareholders or can be reivested to increase earnings.
Maxmum dividend co. can pay without affecting existing cap employed and
affecting value of firm is 11,40,000 / 2,50,000 = 4.56/share
If dividend is not paid additional funds of can be use to earn higher returns
next year
Q22
Surplus cash
Distributed
a.
.
=
=
100 lacs
27% of 100 lac
27 lac
210 lac
239.7 lac
X
( 10,00,000 =
=
=
b.
c.
=
=
27,00,000
) 1.1x
= 1,23,910 shares
.
10 3
10,00,0001,23,910
= 3.424
EVA
20 lac
80 lac
Patent rights
40 lac
EVA =
=
12 - (0.15 x 140)
9 lac
15
140 lac
Q24
Same as 21
Q25
same as 10
Q26 Cost of advertisement, benefit of which will last for 3 years has been completely
written off.
Statement of profit
Operating profit
20,20,00,000
=
=
=
=
16