CORPORATE VALUATION & VALU

EXCEL SPREADSHEET

DR. PRASANNA CHAND

TION & VALUE CREATION

PREADSHEETS

ANNA CHANDRA
 Exhibit 2.1 Ex
Projected Profit and Loss account
Financial Statements of Matrix for the Preceding Three Years( Years 1-3) through 8- The Ex
(Rs.in million)
Profit and Loss Account
1 2 3
Net sales 180 200 229

Income from marketable securities 3

Non-operating income 8
Total income 180 200 240
Cost of goods sold 100 105 125

Selling and general administration expenses 30 35 45

Depreciation 12 15 18
Interest expenses 12 15 16
Total costs and expenses 154 170 204
PBT 26 30 36
Taxes 8 9 12
PAT 18 21 24
Dividend 11 12 12
Retained earnings 7 9 12

Balance Sheet
1 2 3
Equity capital 60 90 90
Reserves and surplus 40 49 61
Debt 100 119 134
Total 200 258 285
Fixed assets 150 175 190
Investments 20 25
Net current assets 50 63 70
Total 200 258 285

The calculation of NOPLAT for Matrix Limited: Exh

Free Cash Flow Forecast for Matrix Lim
Tax rate for Matrix Limited 40% - The Ex
Year 1 Year 2 Year 3
EBIT (=
PBT+interest expense-interest income -non-
operating income) 38 45 41
Tax provision from income statement 8 9 12 1
Add: Tax shield on interest expenses 4.8 6 6.4 2
Less: Tax on interest income 0 0 1.2 3
Less: Tax on non-operating income 0 0 3.2 4
=Taxes on EBIT 12.8 15 14 A
NOPLAT
(=EBIT-taxes on EBIT) 25.2 30 27 5
ROIC
(=NOPLAT/INVESTED CAPITAL) 15.0% 11.3% 6

Net investment [=(Net

fixed assets at the end of the year + net
current assets at the end of the year) - (Net
fixed assets at the beginning of the year +
net current assets at the beginning of the
year)] 38 22 7
8
Exhibit 2.2 : Free Cash Flow B
Gross cash flow (=NOPLAT
+depreciation) 45 45 C
Gross investment
(= increase/(decrease in net current assets +
capital expenditure) 53 40 D
Free cash flow -8 5 E

Exhibit 2.3- Cash Flow Available to Investors F

Year 2 Year 3
Free cash flow -8 5
Add: After-tax non-operating cash flow 0 4.8
Cash flow available to investors -8 9.8

After-tax interest expenses 9 9.6

Add: Cash dividend on equity and preference
capital 12 12
Add: Redemption of debt 0 0

Less: New borrowing 19 15

Add: Share buybacks 0 0
Less: Share issues 30 0
Add: ∆ Excess marketable securities 20 5
Less: After-tax income on marketable
securities 0 1.8
Financing flow -8 9.8
 Projected Profit and Loss account Exhibit 2.8 Limited for five Years- Years 4
for Matrix
through 8- The Explicit Forecast Period
Profit and Loss account
(Rs.in million)
4 5 6 7 8
Net sales 270 320 360 400 440
Income from excess marketable
securities 3 2
Non-operating income
Total income 273 322 360 400 440
Cost of goods sold 144 173 193 218 245
Selling and general
administration 47 59 67 70 77
Depreciation 22 26 29 32 35
Interest expense 18 20 21 23 25
Total costs and expenses 231 278 310 343 382
Profit before tax 42 44 50 57 58
Tax provision 13 16 18 19 18
Profit after tax 29 28 32 38 40
Dividend 15 15 15 16 16
Retained earnings 14 13 17 22 24
Exhibit 2.10
Projected Balance Sheet for Matrix Limited for five Years- Years 4 through 8
- The Explicit Forecast Period
Equity capital 90 90 90 90 90
Reserves& surplus 75 88 105 127 151
Debt 140 150 161 177 192
Total 305 328 356 394 433
Fixed assets 220 240 266 294 324
Investments 10
Net current assets 75 88 90 100 109
Total 305 328 356 394 433

Exhibit 2.11
Free Cash Flow Forecast for Matrix Limited for Five Years- Years 4 through 8
- The Explicit Forecast Period
( Rs.in million)

4 5 6 7 8
Profit before tax 42 44 50 57 58
Interest expense 18 20 21 23 25
Interest income 3 2 0 0 0
Non-operating income 0 0 0 0 0
EBIT:[(1)+(2)-(3)-(4)] 57 62 71 80 83
Tax provision on income
statement 13 16 18 19 18
Tax shield on interest expense 7.2 8 8.4 9.2 10

Tax on interest income 1.2 0.8 0 0 0

Tax on non-operating income 0 0 0 0 0
TAXES ON EBIT:[(5)+(6)-(7)-(8)] 19 23.2 26.4 28.2 28

NOPLAT:[(A)-(B)] 38 38.8 44.6 51.8 55

cfm: NOTE THAT THE

NET INVESTMENT[ 35 33 CAPITAL
INVESTED 28FOR 38 39
FREE CASH FLOW:[(C)-(D)] 3 YEAR5.8
4 AFTER 16.6 13.8 16
ROIC=NOPLAT/INVESTED ADJUSTMENT IS 295
CAPITAL 12.9% 11.8% 12.5% 13.1% 12.7%

Note that the invested capital for year 4 after adjustment is Rs.295 million
Terminal steady growth rate, g 10%
Target capital structure, i.e. D:E 2 : 3
Cost of debt 12.67%
Cost of equity 18.27%
WACC = 14.0%

Value of operations, PV(FCF)

Continuing =NPV(I56,H49:L49) Rs.in million 34.78
value,=FCF8(1+g)/(WACC-g)
=L49*(1+I52)/(I56-I52) Rs.in million 440
PV(CV) =L59/(1+I56)^L36 Rs.in million 228.33
Value of operations =L58+L60 Rs.in million 263.11

,
 Two Stage Growth Model

Base Year( Year 0) Information Inputs for High Growth rate period
( Amounts in Rs.million) Length of the period(in years) 5
Revenues 4,000 Growth rate in revenues & EBIT 10%

as a
percentage of
EBIT revenues 12.5% Growth rate in capital expenditure 10%
Capital expenditure 300 Growth rate in depreciation 10%
Net working capital as a
Depreciation 200 percentage of revenue 30%
as a
percentage of
Net working capital revenues 30% Cost of debt ( pre-tax) 15%
Coroporate tax rate for all time 40% Debt equity ratio 1
Paid up equity capital Rs.10 par 300 Risk-free rate 13%
Market value of debt 1,250 Market risk premium 6%
Equity beta 1.333

Exhibit 2C.1
Forecasted FCF: Exotica Corporation

1 2 3
1 Revenues 4400 4840 5324
2 EBIT 550 605 665.5
3 EBIT(1-t) 330 363 399.3
Capital
expenditure-
4 depreciation 110 121 133.1
∆ Net working
5 capital 120 132 145.2
6 FCF (3-4-5) 100 110 121

Stable
growth
High growth period period
Cost of equity 21.0% 19.00%
WACC 15.0% 15.00%

Present value of the FCF during the explicit forecast period =NPV(D27,C23:G23)
Present value of terminal value =H23/(E27-H4)/(1+D27)^G17
The value of the firm =H29+H30

Three Stage Growth Model

 High
Growth
Base Year (Year 0 ) Information Inputs for the period

(amounts in Rs.million) Length of the period in years 5

Growth rate in revenues,EBIT,
depreciation and capital
Revenues 1,000 expenditure 25%

Decrease per year in the growth

rate of revenues,EBIT,depreciation
EBIT 250 and capital expenditure
Net working capital as a
Capital expenditure 295 percentage of revenues 20%
Depreciation and
amortisation 240 Cost of debt( pre-tax) 15%
Net working capital as
a percentage of
revenues 20% Risk free rate 12%
Tax rate for all time to
come 40% Market risk premium 6%
Equity beta 1.583

During High growth period Transition period

Cost of equity =E40+E42*E41 21.50% =F40+F42*F41 17.60%

=I35/(I35+K35)*E39*(1- =I36/(I36+K36)*F39*(1-B41)+K36/
WACC B41)+K35/(I35+K35)*C45 (I36+K36)*E45
14.00% 13.00%

Exhibit 2C.2
Forecasted FCF: Multiform Limited (amounts in Rupees million)

Period Growth rate EBIT(1-t) Capital expenditure Depn.

1 25% 187.5 368.8 300
2 25% 234.4 460.9 375.00
3 25% 293.0 576.2 468.75
4 25% 366.2 720.2 585.94
5 25% 457.8 900.3 732.42
6 22% 558.5 1098.3 893.55
7 19% 664.6 1307.0 1063.33
8 16% 770.9 1516.1 1233.46
9 13% 871.1 1713.2 1393.81
10 10% 958.2 1884.6 1533.19

Terminal value at the end of year 10 =H61*(1+G36)/(F47-G36)

=F63/(1+B47)^A56/(1+D47)^(A61-
Present value of the terminal value A56)
Value of the firm =J62+F64
odel

High Growth rate period Stable Growth Period

6%

is equal to
growth rate
in
depreciation

30%

15%
: 1 2 : 3
12%
7%
1.0

n
(Rs.in million)
4 5 Terminal year
5856.40 6442.04 6828.56
732.05 805.26 853.57
439.23 483.15 512.14

146.41 161.05

159.72 175.69 115.96

133.10 146.41 396.19

=NPV(D27,C23:G23) 398.59 million rupees

=H23/(E27-H4)/(1+D27)^G17 2,188.70 million rupees
=H29+H30 2,587.29 million rupees

wth Model
 Stable
Transition Growth
period period Debt : Equity
High Growth
5 Period 1.5 : 1

Transition
10% Period 1 : 1

Stable
Growth
3% Period 0 : 1

20% 20%

14% 12%

11% 10%

6% 6%
1.1 1.00

Stable growth period

=G40+G42*G41 16.00%

=I37/(I37+K37)*G39*(1-B41)+K37/(I37+K37)*H45
16.00%

(amounts in Rupees million)

Present
NWC ∆NWC FCF WACC value
250 50 68.8 14.00% 60.31
312.5 62.5 85.9 14.00% 66.13
390.6 78.1 107.4 14.00% 72.51
488.3 97.7 134.3 14.00% 79.51
610.4 122.1 167.8 14.00% 87.18
744.6 134.3 219.4 13.00% 100.85
886.1 141.5 279.4 13.00% 113.66
1027.9 141.8 346.5 13.00% 124.72
1161.5 133.6 418.1 13.00% 133.18
1277.7 116.2 490.7 13.00% 138.34
Sum= 976.37
8996.87 million rupees

2536.24 million rupees

3512.61 million rupees
 Equity beta calculation: Illustration in page 3.11 & 3.12

Name of the company Equity beta Tax rate Debt equity ratio Asset beta
Apex Chemicals 1.20 30% 1.2 0.65
Modern Chemicals 1.10 30% 1.1 0.62
Sintex Industries 1.05 30% 1.2 0.57
Dowtek Chemicals ? 30% 0.8
Asset beta of Dowtek= 0.61
Equity beta of Dowtek= 0.96

Calculation of average cost of debt for Multiplex Limited ( in page 3.13)

Multiplex Limited: Debenture details
Face value Rs. 1,000
Coupon rate 12%
Remaining period to
maturity(in years) 4 Yield to maturity using the approximate formula
Current market price Rs. 1,040 Formula used is =(B13*B14+(B13-B16)/B15)/(0.4*B13+0.6*B16)

Commercial paper details

Face value Rs. 1,000,000 The implicit interest rate for the remaining period
Remaining period(in years) 0.5 Formula used =B19/B21-1
Current market price Rs. 965,000 The implicit interest rate/discount rate per annum
Formula used =(1+F19)^(1/B20)-1

(Amounts in Rs.million)
YTM or
Debt Instrument Face Value Market Value Coupon Rate Current Rate
Non-convertible debentures 100 104 12% 10.7%
Bank loan 200 200 13% 12%
Commercial paper 50 48.25 NA 7.39%
Total = 352.25
Average cost of debt using market value proportions and yields 11.00%
Formula used =E26*(C26/C29)+E27*(C27/C29)+E28*(C28/C29)

Exhibit 3.1
Calculation of the WACC for Bharat Nigam Limited
Tax rate = 30%
Source of Capital Proportion (1) Cost (2) Weighted Cost [(1) x (2)]
Debt 35.00% 8.40% 2.94%
Preference 5.00% 14.00% 0.70%
Equity 60.00% 16.00% 9.60%
WACC = 13.24%
2

Formula
=B4/(1+D4*(1-C4))
=B5/(1+D5*(1-C5))
=B6/(1+D6*(1-C6))

=AVERAGE(E4:E6)
=E8*(1+D7*(1-C7))

age 3.13)

10.7%
)/B15)/(0.4*B13+0.6*B16)

3.63%
/B21-1
7.39%
^(1/B20)-1
 Two Stage Growth Model- Illustration ( page 4.6 )
Extraordinarty growth rate g1 20%
Length of extraordinary growth rate ( in years) n 6
Normal growth rate g2 10%
Required return on equity r 15%
Current dividend Rs. D0 2.00
Dividend expected a year hence Rs. D1=D0(1+g1 ) 2.4
Intrinsic value estimate Rs. P0
70.76
Formula used =C7*(1-((1+C2)/(1+C5))^C3)/(C5-C2)+C7*(1+C2)^(C3-1)*(1+C4)/(C5-C4)/(1+C5)^C3

Two Stage Growth Model- Illustration ( page 4.8 )

Current dividend Rs. D0 3.00
High initial above average growth rate( current growth rate) ga 50%
(Period in years in which growth rate declines linearly) /2 H 5
Normal growth rate gn 12%
Required return on equity r 16%
Intrinsic value estimate Rs. P0 226.5
Formula used =A13*((1+A16)+A15*(A14-A16))/(A17-A16)

Free Cash Flow to Equity (FCFE) Model ( page 4.10 )

3 4 5
Profit after tax 24 29 28
Preference dividend
Fixed assets (net) 190 220 240
Investments 25 10
Net current assets 70 75 88
Debt 134 140 150
Preference

The FCFE forecast for the explicit period, years 4 through 8:

4 5
(Profit after tax - Preference dividend ) 29 28
- ( Capital expenditure -Depreciation ) 30 20
- (Change in net current assets) 5 13
+ ( New debt issue - debt repayment ) 6 10
-( Change in investment in marketable securities) -15 -10
FCFE 15 15
Cost of equity 15%
The constant FCFE growth rate after the explicit growth period 10%
Equity value (at the end of year 3) Formula used
=NPV(B39,C38:G38)+G38*(1+B

Adjusted Present Value Model

Illustration in page 4.14

Years 1 2 3
Free csh flow to the firm 200 250 300
Interest-bearing debt 500 400 300
Interest expense 60 48 36

Constant growth rate per annum in free cash flow beyond year 5 10%
Unlevered cost of equity 14%
Debt-equity ratio maintained after year 5 4 : 7

Borrowing rate 12%

Tax rate 30%
Risk-free rate 8%
Market risk premium 6%

Present value of the unlevered equity free cash flow Formula used =NPV(B53,B48:F48)
Present value of the interest tax shield during the planning period =NPV(B55,B56*B50,B56*C50,B56*D50,B56*E50,B
Present value of the terminal value at the end of the planning period =F48*(1+B52)/(G55-B52)/(1+B53)^F47
Enterprise value of the firm =F60+F61+F62
) Model ( page 4.10 )
( Rs.in crore)
6 7 8
32 38 40

266 294 324

90 100 109
161 177 192

eriod, years 4 through 8:

6 7 8
32 38 40
26 28 30
2 10 9
11 16 15
0 0 0
15 16 16

Rs. 226.36 crores

V(B39,C38:G38)+G38*(1+B40)/(B39-B40)/(1+B39)^(G32-C32+1)

ue Model
e 4.14

4 5
340 380
 200 100
24 12

Unlevered equity beta =(B53-B57)/B58 1

Levered equity beta =G52*(1+B54/D54*(1-B56)) 1.4
Cost of levered equity =B57+G53*B58
=D54/ 16.4%
WACC beyond the planning (B54+D54)*G54+B54/
period (B54+D54)*B55*(1-B56) 13.49%

=NPV(B53,B48:F48) Rs. 968.96 million

6*C50,B56*D50,B56*E50,B56*F50) Rs. 41.86 million
2)/(1+B53)^F47 Rs. 6218.90 million
Rs. 7,229.72 million
 Illustration in Page 5.3
( Amounts in Rs.million)

D A B C
Sales 2,500 1,600 2,000 3,200
EBITDA 400 280 360 480
Book value of assets 1,000 800 1,000 1,400
Enterprise value ? 2,000 3,500 4,200
EV-EBITDA 7.1 9.7 8.8
EV-Book value 2.5 3.5 3.0
EV-sales 1.25 1.75 1.31

Multiples for firm D applying the average multiples as above

( Amounts in Rs.million)
Book
EBITDA Value
Basis Basis
Average EV-EBITDA 8.53 Average EV-book value 3.00 Average EV-sales
EBITDA of D 400 Book value of D 1,000 Sales of D
EV of D 3,413 EV of D 3,000 EV of D
Arithmetic average of the three estimates of EV = 3,335

Page 5.5: Example of P/E multiple: Page 5.6: Example of P/B multiple: Page 5.8: Example of P/S multiple:
ROE 18% ROE 20% NPM
Cost of equity (r ) 15% Cost of equity (r ) 16% Cost of equity (r )
Dividend payout ratio 0.4 Dividend payout multiple 0.4 Dividend payout ratio
Ploughback ratio 0.6 Growth rate(g) 12% Growth rate(g)
P0 / E 1 9.52 P/B 2.24 P/B

Page 5.10: Example of EV/EBITDA: Page 5.11: Example of EV0/EBIT1: Page 5.11: Example of EV/FCFF:
ROIC 18% Tax rate 30% WACC
Growth rate(g) 12% Reinvestment rate 80% Growth rate(g)
DA 10% WACC 14% EV0 /FCFF1
Tax rate 30% Growth rate(g) 11%
WACC 0.14 EV0/EBIT1 4.67
EV/EBITDA 10.5

Page 5.12: Example of EV/BV: Page 5.12: Example of EV/Sales:

ROIC 15% After tax operating margin 12%
Growth rate(g) 10% Growth rate(g) 11%
WACC 12% Reinvestment rate 70%
EV0/BV0 2.50 WACC 13%
EV0/S0 2.00
 ( Amounts in Rs.million)
Average for
A,B & C

8.53
3.00
1.44

( Amounts in Rs.million)

Sales Basis
1.44
2,500
3,592

Example of P/S multiple:

8%
16%
0.3
12%
0.67

1: Example of EV/FCFF:
15%
12%
33.3
 Binomial Model
Illustration : page 6.24

S =Rs. 200
E = Rs. 220
u = 1.4
d = 0.9
r = 0.1
R = 1.1

Black and Scholes Model: Illustration in page 6.27 to 6.29

Price of stock now S0

Exercise price E
Standard deviation of continuously
compounded annual return σ
Years to maturity t
Interest rate per annum d1 r
d2 =(LN(C1/C2)+(C5+(C3^2)/2)*C4)/(C3*(C4^0.5))
=C6-C3*(C4^0.5)
Equilibrium value of call option now, C0 = C1*NORMSDIST(C6)-(C2/EXP(C5*C4))*NORMSDIST(C7)

Exhibit 6A.3

Year 0
Initial outlay -150
After-tax operating cash flow
Terminal cash flow
Net cash flow -150
Cost of capital 18%
Present value of cash flows -150
Present value of cash inflows 132.5
Net present value -17.5

Investment required
Price of stock now in Electriad-II S 0

Exercise price E
Standard deviation of continuously
compounded annual return σ
Years to maturity t
Interest rate per annum d1 r
d2 =(LN(C1/C2)+(C5+(C3^2)/2)*C4)/(C3*(C4^0.5))
=C6-C3*(C4^0.5)
Equilibrium value of call option now, C0 = C1*NORMSDIST(C6)-(C2/EXP(C5*C4))*NORMSDIST(C7)
Model
age 6.24
Formula
Cu =MAX(B6*B4-B5,0) 60
Cd =MAX(B7*B4-B5,0) 0
∆ =(H4-H5)/((B6-B7)*B4) 0.6
B =(B7*H4-B6*H5)/((B6-B7)*B9) 98.18
C =I6*B4-I7 Rs. 21.82

60
56

0.3
0.5
0.14
0.7613
0.5492
9.61

(Amounts in million)
1 2 3 4 5

20 40 50 50 40
30
20 40 50 50 70

16.9 28.7 30.4 25.8 30.6

300
129
300

0.4
4
12%
-0.0551
-0.8551
25.23
 Illustration in page 7.14
(Rs. In million)
Proposed investment in the equity 1,000
Required return from the investment 30%
Planned holding period(years) 5
Projected EBITDA for year 5 1,500
Reasonable EBITDA multiple for year 5 7
Likely debt at the end of year 5 1,000
Likely cash balance at the end of year 5 300
Required value of PE investments 3,713
Estimated equity value at the end of year 5 9,800
Ownership share 37.9%
Post-money investment value of the firm's equity 2,639
Pre-money investment value 1,639

Exhibit 7.2
1 2 3 4
20x0 20X1 20X2 20X3
Turnover 500,000 560,000 627,200 702,464
Royalty income@5% 25,000 28,000 31,360 35,123
Taxation @ 30% 7,500 8,400 9,408 10,537
Post-tax royalty income 17,500 19,600 21,952 24,586
Discount factor 0.901 0.812 0.731 0.659
Net present value 15,766 15,908 16,051 16,196
Net present value of the royalty stream 274,469
Assumptions:
Growth rate in turnover 12% 12% 12% 12%
Rate of royalty income 5% 5% 5% 5%
Tax rate 30% 30% 30% 30%
Discount factor 11% 11% 11% 11%
.2
5 6 7 8 9 10
20X4 20X5 20X6 20X7 20X8 Residual
786,760 849,700 917,676 991,091 1,070,378 1,070,378
39,338 42,485 45,884 49,555 53,519
11,801 12,746 13,765 14,866 16,056
27,537 29,740 32,119 34,688 37,463 340,575
0.593 0.535 0.482 0.434 0.391 0.391
16,342 15,900 15,470 15,052 14,645 133,139 `

12% 8% 8% 8% 8% 0
5% 5% 5% 5% 5% 5%
30% 30% 30% 30% 30% 30%
11% 11% 11% 11% 11% 11%
 Exhibit 13.1 Financial Particulars of Firms X and Y
X Y
Total Capital Employed 1,000,000 1,000,000
Equity Capital 1,000,000 600,000
Debt 0 400,000
Net Operating Income 100,000 100,000
Debt Interest 0 20,000
Market Value of Debt 0 400,000
Debt Capitalisation rate 5.00%
Equity Earnings 100,000 80,000
Equity Capitalisation Rate 10% 12%
Market Value of Equity 1,000,000 666,667
Total Market Value of the Firm 1,000,000 1,066,667
Average Cost of Capital 10.00% 9.38%
Valuation of the two firms assumed:
Firm X Firm Y
Debt Interest 0 20,000
Market Value of Debt 0 400,000
Debt Capitalisation rate 0 5.00%
Equity Earnings 100,000 80,000
Equity Capitalisation Rate 8% 12%
Market Value of Equity 1,250,000 666,667
Total Market Value 1,250,000 1,066,667

Exhibit 13.2 Corporate Taxes and Income of Debtholders

and Stockholders

Expected operating income 1,000,000 1,000,000

Debt capital 0 4,000,000
Interest on debt capital 12%
Corporate tax rate 50% 50%
A B
Net operating income 1,000,000 1,000,000
Interest on debt 0 480000
Profit before taxes 1,000,000 520,000
Taxes 500,000 260,000
Profit after tax( Income available to
stockholders) 500,000 260,000
Combined income of debtholders and
stockholders 500,000 740,000
Exhibit 13.3 Personal Taxes and Income of Debtholders and
Stockholders
Firm A Firm B
Income to Stockholders 500,000 260,000
Personal taxes rate 30% 30%
Personal taxes 150000 78000
Income to stockholders after personal
taxes 350,000 182,000
Income to debtholders 0 480000
Less personal taxes 0 144000
Income to debtolders after personal
taxes 0 336000

Combined income of debtholders and

stockholders after personal taxes 350,000 518,000

TC 0.3
TPS 0.1
TPD 0.25
The tax advantage of a unit of debt 0.16

Exhibit 13.5 Relationship between ROI and ROE under capital structures A and B
Capital Structure A
Equity 100
Debt 0
Average cost of debt 10%
Tax rate 50%
ROI 5% 10% 15% 20% 25%
PBIT 5 10 15 20 25
Interest 0 0 0 0 0
Profit before tax 5 10 15 20 25
Tax 2.5 5 7.5 10 12.5
Profit after tax 2.5 5 7.5 10 12.5
Return on equity 2.5% 5.0% 7.5% 10.0% 12.5%

Exhibit 13.7
Selling price per unit 1,000
Variable operating cost per unit 400
Fixed operating costs 20,000,000
Fixed interest burden 4,000,000
Income tax applicable to the company 30%
No.of outstanding shares 1,000,000
Income Statement
Level of sales 50,000 60,000
Sales 50000000 60000000
Less:Variable costs 20000000 24000000
Contribution 30000000 36000000
Less: fixed operating costs 20,000,000 20,000,000
Profit before interest and tax(PBIT) 10,000,000 16,000,000
Interest 4,000,000 4,000,000
Profit before tax(PBT) 6,000,000 12,000,000
Tax 1800000 3600000
Profit after tax 4,200,000 8,400,000
Earning per share(EPS) 4.2 8.4

DOL 3
DFL 1.67
DTL 5

Interest coverage ratio

PBIT(in Rs.million) 120
Interest burden on debt(Rs.in million) 20
Interest coverage ratio 6

Cash Flow Coverage Ratio

(Rs.in million)
Depreciation 20
PBIT 120
Interest on debt 20
Tax rate 50%
Loan repayment instalment 20
Cash flow coverage ratio 2.33

Exhibit 13.9 Share Buyback, Hypothetical Example

(Rs. in million)
Income
Balance Sheet Before After Statement Before After
Operating assets 800 800 PBIT 180 180
Cash 200 Interest 10
Total assets 1000 800 Net income 190 180
Equity 1000 800 Other information
Shares
outstanding 10,000,000 9,000,000
Value Share price 200 200
Value of operations 1800 1800 EPS 19 20
Cash 200 0 P/E 10.53 10.00
ROIC(PBIT/
operating
Total equity value 2000 1800 assets) 22.50% 22.50%
der capital structures A and B
Capital Structure B
50
50
10%
50%
5% 10% 15% 20% 25%
5 10 15 20 25
5 5 5 5 5
0 5 10 15 20
0 2.5 5 7.5 10
0 2.5 5 7.5 10
0.0% 5.0% 10.0% 15.0% 20.0%
Exhibit 17A.1 Relevant Information for Firms 1 and 2
Firm 1 Firm 2
Total earnings, E 18,000,000 6,000,000
No.of outstanding shares, S 9,000,000 6,000,000
Earnings per share, EPS 2 1
Market price per share, P 24 8
Price/earnings ratio, PE 12 8

Maximum exchange ratio acceptable to the shareholders of firm 1 for some illustrative values of PE 12
PE12 9 10 11 12 15 20
Maximum ER1 0 0.17 0.33 0.50 1.00 1.83

Minimum exchange ratio acceptable to the shareholders of firm 2 for some illustrative values of PE 12
PE12 3 9 10 11 12 15
Minimum ER2 3.00 0.43 0.38 0.33 0.30 0.23
20
0.17
 Exhibit 19.4
Determination of Value Created by a New Strategy
------------------------------------------------------- -------------- -------------------------- -----------------
Current Income Statement Projections
Value 1 2
(Year 0)
------------------------------------------------------- -------------- -------------------------- -----------------
Sales 1000 1100 1210
Gross Margin 250 275 303
S & G.a. 100 110 121
Profit Before Tax 150 165 182
Tax 60 66 73
-------------- -------------------------- -----------------
Net Profit 90 99 109
-------------- -------------------------- -----------------
Balance Sheet Projections
Fixed Assets 300 330 363
Current Assets 200 220 242
-------------- -------------------------- -----------------
Total Assets 500 550 605
Equity 500 550 605
-------------- -------------------------- -----------------
Cash Flow Projections
Profit After Tax 99 109
Depreciation 30 33
Capital Expenditure 60 66
Increase in Current Assets 20 22
-------------- - -
Operating Cash Flow 49 54
-------------- - -
Present Value Factor 0.862 0.743
PV of Operating Cash Flow 42 40
------------------------------------------------------- -------------- -------------------------- -----------------
PV of Operating Cash Flow Stream 190
Residual value 905
PV of Residual Value 431
Total Share Holder Value 621
Pre-Strategy VAlue 563
Value of Strategy 59
------------------------------------------------------- -------------- -------------------------- -----------------

ASSUMPTIONS

Annual rate of increase in Sales 10.00%

Gross Margin 25.00%
S and G.A: 10.00%
Fixed Assets 10.00%
Current Assets 10.00%
Discount rate for Present Value 16.00%
Tax rate 40.00%
 Exhibit 19.7 Balance Sheet and Profit and Loss Account of Melvin Corporation
(in million)
Cost of equity 18%
Interest rate on debt 12%
Tax rate 30%

Balance Sheet as on 31-3-20X0

Liabilities Assets
Equity 100 Fixed assets 140

Debt 100 Net current assets 60

200 200

Post-tax cost of debt 8.40%

WACC 13.20%
NOPAT 29.4
Return on capital 14.7%
Formula used
EVA 3
=B68-B67*B61
EVA 3
=B61*(B69-B67)
EVA 3
=(F65+F62*(1-B56))-B67*B61
EVA 3
=F65-B54*B59
Exhibit 19.8
Depreciation Charge and Capital Charge under Alternative Methods
Cost of the equipment 100,000
Economic life(in years) 5
Cost of capital 15%
Salvage value 0
Part A: Straight Line Method
1 2 3
Capital 100,000 80,000 60,000
Depreciation 20,000 20,000 20,000
Capital charge 15,000 12,000 9,000
Sum 35,000 32,000 29,000
Part B: Sinking Fund Method
Capital 100,000 85,168 68,112
Depreciation 14,832 17,056 19,615
Capital charge 15,000 12,775 10,217
Sum(Annuity) 29,832 29,832 29,832
=PMT($B$56,$B$55,-($B$54-$B$57))

Exhibit 19.9 Capital Budgeting : DCF Method and EVA Method

Part A: Project Details
Investment 100 Equity financing 100
Project life ( in years) 4 Depreciation Straight line
Salvage value 0 Tax rate 50%
Annual revenues 200 Annual costs 135
(excluding depreciation, interest
Cost of equity 15% and taxes)
Part B: Cash Flow and EVA Projections
Year 1 2 3
Revenues 200 200 200
Costs (excluding dep, interest & taxes 135 135 135
PBDIT 65 65 65
Depreciation 25 25 25
PBIT 40 40 40
NOPAT 20 20 20
cash flow 45 45 45
Capital at charge 100 75 50
Capital charge 15 11.25 7.5
EVA (NOPAT - Capital charge) 5 8.75 12.5

Part C: NPV Calculation

PV of cash inflows 39.13 34.03 29.59
NPV under DCF method
28.47 =SUM(B115:E115)-B96
PV of EVA 4.35 6.62 8.22
NPV using EVA
28.47 =SUM(B118:E118)

Exhibit 19.11 Bonus Bank System

Normal
year Good year Bad year
Bonus earned 50 200 -100
Beginning bank 100 100 200
Cumulative balance 150 300 100
Payout ratio 1/3 1/3 1/3
Bonus paid 50 100 33 1/3
Bonus forward 100 200 66 2/3

Exhibit 19.15 Annual Measurement of the Project in Three Sample Years

Initial investment 300,000
Investment in fixed assets 250,000
Net working capital 50,000
Economic life of the plant (in years) 14
Salvage value of the fixed assets at the
end of 14 years 0
Salvage value of the net working capital
at the end of 14 years 100%
Annual depreciation charge on fixed
assets 17,857
NOPAT each year 21,080
Cost of capital 10%
Cost of replacement of fixed assets 250,000
Year 1 6 12
NOPAT 21,080 21,080 21,080
Depreciation 17,857 17,857 17,857
Cash flow(1+2) 38,937 38,937 38,937
Economic depreciation 8,937 8,937 8,937
Sustainable cash flow 30,001 30,001 30,001
Book capital 300,000 210,714 103,571
CFROI (%) 10.00% 10.00% 10.00%
ROCE(%) 7.03% 10.00% 20.35%
ROGI (%) 12.98% 12.98% 12.98%

Exhibit 19.16 EVA and CVA Calculations

Panel A: EVA
Year 1 6 12
NOPAT 21,080 21,080 21,080
Book capital 300,000 210,714 103,571
Cost of capital 10% 10% 10%
Capital charge 30,000 21,071 10,357
EVA -8,920 9 10,723
Panel B: CVA
NOPAT 21,080 21,080 21,080
Depreciation 17,857 17,857 17,857
Cash flow 38,937 38,937 38,937
Economic depreciation 8,937 8,937 8,937
Cash invested 300,000 300,000 300,000
Cost of capital 10% 10% 10%
Capital charge on gross investment 30,000 30,000 30,000
CVA 1 1 1

Note: CVA is 1 owing to rounding off errors. It should be 0

 19.4
eated by a New Strategy
------------------------------------ ----------- -------------- --------------
Income Statement Projections Residual
3 4 5 value
5+
------------------------------------ ----------- -------------- --------------
1331 1464 1611 1611
333 366 403 403
133 146 161 161
200 220 242 242
80 88 97 97
------------------------------------ ----------- -------------- --------------
120 132 145 145
------------------------------------ ----------- -------------- --------------
Balance Sheet Projections
399 439 483 483
266 293 322 322
------------------------------------ ----------- -------------- --------------
666 732 805 805
666 732 805 805
------------------------------------ ----------- -------------- --------------
Cash Flow Projections
120 132 145 145
36 40 44 44
73 80 88 44
24 27 29 0
- - - -
59 65 72 145
- - - -
0.641 0.552 0.476
38 36 34
------------------------------------ ----------- -------------- --------------

------------------------------------ ----------- -------------- --------------

count of Melvin Corporation
(in million)

Profit and Loss Statement for the

Year Ending on 31-3-20X0

Net Sales 300

Cost of goods sold 258

PBIT 42
Interest 12
PBT 30
Tax 9
PAT 21

B67*B61

r Alternative Methods

od
4 5
40,000 20,000
20,000 20,000
6,000 3,000
26,000 23,000
od
48,497 25,940
22,557 25,940
7,275 3,891
29,832 29,832

nd EVA Method
ns
4
200
135
65
25
40
20
45
25
3.75
16.25

25.73

9.29