Degree of Difficulty (Not difficult)

1. Suppose XYZ company’ had last year earnings of $1.65 per share
for the 12-month period ended in March, 2016. XYZ’s CFO
estimates that company earnings for 2017 will be $1.83 a share.
The current P/E ratios for three comparable firms are 26.85, 18.79
& 22.18 and thus the comparable average PE ratio is 22.61. Based
on above information, estimate the value of the common stock?

2. XYZ company is on verge of liquidation and an investment bank

estimated that upon liquidation the total asset of the company is
Rs. 525, 0000 total liability of Rs. 450,0000 and 100000 of share
of common share outstanding. Find the liquidation value of the
common stock?

3. The firm needs Rs. 5,00,000 for expansion of a new project. The
company earns above 10% net profit over a period of last 10 years.
The valuation multiples are consistent and better than most of its
competitors. The CFO of the company would like to finance this
expansion by issuing new shares, where the new issue can be sold
at Rs. 90 per share. The current market price of a share is RS. 100.
The expected dividend per share at the end of the current financial
year is Rs. 5 with a growth rate of 5%. Against this backdrop,
 compute the new price per share and number of shares the firm
must issue to finance the entire expansion cost.

Degree of Difficulty (Somewhat difficult)

4. A 40% tax bracket XYZ firm has an asset of Rs.20,00,000, where

it is financed with equity of RS.1 2,00,000 equity, debt of Rs.
5,00,000 and rest amount with a general reserve. The firm is
struggling to improve the bottom line and trying to reduce the
average fixed cost of the business. The firm’s total profit after
interest and tax is Rs. 1,50, 000. The firm pays 8% interest on debt
and it has 1000 equity shares and the market price of each share is
Rs. 125. Given the information find out the weighted average cost
of capital for the XYZ firm.

5. An investor wishes to invest in a company based on the free cash

flow valuation method. The company’s free cash flows for last five
years are available in the public domain and it is growing
consistently. The free cash flows of the company are found to be
Rs.500,000, Rs.560,000, Rs.630, 000, Rs.560,000 and Rs. 600,000
for the year 2014,2015,2016,2017 and 2018 respectively. Market
value of preferred stock and market value of debt capital are
observed to be Rs. 800,000, and 3,100,000 respectively. The firm
 is expected to grow at 4% rate beyond 2018, the overall cost of
capital of the firm is 9% and the firm has 300000 units of share
outstanding by the end of 2018. Given the information find out the
total value of the firm and the value of the equity per share.

6. Assuming firms are operating in no taxes and 10% interest

environment. The EBIT, market value of debt and equity
capitalization rate (Ke) of each firm are given below. Based on the
aforesaid information compute the following:
(i) Total market value of each firm.
(ii) Cost of debt for each firm
(iii) WACC for each firm

Firm
s EBIT Market Value of Debt Cost of Equity (Ke)
a Rs. 200,000 Rs. 20,000 12
b 300,000 60,000 16
c 500,000 200,000 15
d 600,000 240,000 18