Facts given in the case:

P's growth rate in sales 11%

K's present growth rate in sales 4%
Yearly increment in above 1% if the management's plan brings desired fruits
K's perpetual growth rate in sales 9% post 5 years
Industry growth rate 10%
COGS as %age to sales 66% right from the first forecast year
Admin. Expenses as %age to sales 16% right from the first forecast year
Royalty (annual for 3 years) 1.0 crore
Current share price 23 Rs.
CAPEX as %age to sales 5% i.e. CAPEX / Sales
Corporate tax rate 35%
Forecast horizon 5 years

Earning per share 3.32 Rs.

Dividend per share 1.8 Rs.
Equity (aka book value) 730 crore
Equity capital 250 crore
Face value per share 10 Rs.
Total debt 240 crore
Working capital 575 crore
 Actual Forecast or Projected
2019 2020 2021 2022 2023 2024
Past sales 1695
Growth in sales 5% 6% 7% 8% 9%
Projected sales 1780 1887 2019 2180 2376
COGS as %age to sales 66% 66% 66% 66% 66%
- COGS 1175 1245 1332 1439 1568
= Gross Profit 605 641 686 741 808
Admn OH as %age to sales 16% 16% 16% 16% 16%
- Admn OH 285 302 323 349 380
- Royalty 1 1 1
- Depreciation 46 51 56 61 67
= EBIT 273 288 306 331 361
- Hyp taxes @35% 96 101 107 116 126
+ Depreciation 46 51 56 61 67
- CAPEX 89 94 101 109 119
+/- Change in WC 29 36 45 55 67
= FREE CASH FLOWS 106 107 109 113 116
Terminal Value 1832
= Total Free Cash Flows 106 107 109 113 1948
Discount factors @WACC 0.893862 0.798989 0.714186 0.638384 0.570627
PV of FCF 95 86 78 72 1111
= Value of the Firm, V 1442 <== Intrinsic Value of the firm
- Value of Debt, D 240
= Value of Equity, E 1202 <== Intrinsic Value of E
Value per Share 48 <== intrinsic value of one share
compare it with CMP
Hence, we recommend the top management to go ahead with the three pronged strategy!

2019 2020 2021 2022 2023 2024

WC to sales ratio 34%
Working capital 575
Forecast WC 604 640 685 740 806
Change in WC 29 36 45 55 67

Caculation of Depreciation for Forecast period

2019 2020 2021 2022 2023 2024
Opening bal of FA 412 372 415 458 503 551
+ purchases (capex) 89 94 101 109 119
412 461 509 559 612 670
- Depreciation @10% 40 46 51 56 61 67
= Ending bal of FA 372 415 458 503 551 603

Calculation of WACC
Cost of Debt calc:
Value of D 240
Interest 30 Growth rate, g 5.21%
Kd 12.5%
Cost of Equity Calc:
BV of equity 730
Market price per share 23
Number of shares 25
Mkt value of E 575
Ke, cost of equity = Do*(1+g)/Po + g
13.44%
Wt of D, Wd 0.2944785
Wt of E, We 0.7055215
WACC 11.87%
TV = FCFn+1 / (WACC - g)

Terminal value = PV of FCF (from n+1 year to infinity)

= PV of FCF (2025 to inf)

= FCFn*(1+g) / (WACC - g)
where, g = growth rate of the firm
 Actual Forecast or Projected
2019 2020 2021 2022 2023 2024
Past sales 1695
Growth in sales 5% 6% 7% 8% 9%
Projected sales 1780 1887 2019 2180 2376
COGS as %age to sales 66% 66% 66% 66% 66%
- COGS 1175 1245 1332 1439 1568
= Gross Profit 605 641 686 741 808
Admn OH as %age to sales 16% 16% 16% 16% 16%
- Admn OH 285 302 323 349 380
- Royalty 1 1 1
- Depreciation 46 51 56 61 67
= EBIT 273 288 306 331 361
- Hyp taxes @35% 96 101 107 116 126
+ Depreciation 46 51 56 61 67
- CAPEX 89 94 101 109 119
+/- Change in WC 29 36 45 55 67
= FREE CASH FLOWS 106 107 109 113 116
Terminal Value 1573
= Total Free Cash Flows 106 107 109 113 1689
Discount factors @WACC 0.885203 0.783585 0.693632 0.614005 0.543519
PV of FCF 94 84 76 69 918
= Value of the Firm, V 1241 <== Intrinsic Value of the firm
- Value of Debt, D 240
= Value of Equity, E 1001 <== Intrinsic Value of E
Value per Share 40 <== intrinsic value of one share
compare it with CMP
Hence, we recommend the top management to go ahead with the three pronged strategy!

2019 2020 2021 2022 2023 2024

WC to sales ratio 34%
Working capital 575
Forecast WC 604 640 685 740 806
Change in WC 29 36 45 55 67

Caculation of Depreciation for Forecast period

2019 2020 2021 2022 2023 2024
Opening bal of FA 412 372 415 458 503 551
+ purchases (capex) 89 94 101 109 119
412 461 509 559 612 670
- Depreciation @10% 40 46 51 56 61 67
= Ending bal of FA 372 415 458 503 551 603

Calculation of WACC
Cost of Debt calc:
Value of D 240
Interest 30 Growth rate, g 5.21%
Kd 12.5%
Cost of Equity Calc:
BV of equity 730
Market price per share 23
Number of shares 25
Mkt value of E 575
Ke, cost of equity = Rf + Beta *(Rm - Rf)
14.99%
Wt of D, Wd 0.2944785
Wt of E, We 0.7055215
WACC 12.97%
TV = FCFn+1 / (WACC - g)

Terminal value = PV of FCF (from n+1 year to infinity)

= PV of FCF (2025 to inf)

= FCFn*(1+g) / (WACC - g)
where, g = growth rate of the firm
 Actual Forecast or Projected
2019 2020 2021 2022 2023 2024
Past sales 1695
Growth in sales 5% 6% 7% 8% 9%
Projected sales 1780 1887 2019 2180 2376
COGS as %age to sales 66% 66% 66% 66% 66%
- COGS 1175 1245 1332 1439 1568
= Gross Profit 605 641 686 741 808
Admn OH as %age to sales 16% 16% 16% 16% 16%
- Admn OH 285 302 323 349 380
- Royalty 1 1 1
- Depreciation 46 51 56 61 67
= EBIT 273 288 306 331 361
- Hyp taxes @35% 96 101 107 116 126
+ Depreciation 46 51 56 61 67
- CAPEX 89 94 101 109 119
+/- Change in WC 29 36 45 55 67
= FREE CASH FLOWS 106 107 109 113 116
Terminal Value 1813
= Total Free Cash Flows 106 107 109 113 1929
Discount factors @WACC 0.893325 0.798029 0.712899 0.63685 0.568914
PV of FCF 95 86 78 72 1098
= Value of the Firm, V 1428 <== Intrinsic Value of the firm
- Value of Debt, D 229.4 <== mkt val of bonds (D1) plus BV of loan (D2)
= Value of Equity, E 1198 <== Intrinsic Value of E
Value per Share 48 <== intrinsic value of one share
compare it with CMP
Hence, we recommend the top management to go ahead with the three pronged strategy!

2019 2020 2021 2022 2023 2024

WC to sales ratio 34%
Working capital 575
Forecast WC 604 640 685 740 806
Change in WC 29 36 45 55 67

Caculation of Depreciation for Forecast period

2019 2020 2021 2022 2023 2024
Opening bal of FA 412 372 415 458 503 551
+ purchases (capex) 89 94 101 109 119
412 461 509 559 612 670
- Depreciation @10% 40 46 51 56 61 67
= Ending bal of FA 372 415 458 503 551 603

Calculation of WACC
Cost of Debt calc:
Value of D 240 ==> Bonds 200 and Term loan 40
Interest 30 Growth rate, g 5.21%
Kd1 12.3% Calc of Kd1:
Cost of Equity Calc: Kd2 14% Maturity 6
BV of equity 730 D1 189.4 Coupon 11%
Market price per share 23 D2 40 FV 1000
Number of shares 25 E 575 Mkt price 947
Mkt value of E 575 Wd1 0.235455 YTM 12.3%
Ke, cost of equity = Do*(1+g)/Po + g Wd2 0.049727
13.44% We 0.714818

WACC 11.94%
TV = FCFn+1 / (WACC - g)

Terminal value = PV of FCF (from n+1 year to infinity)

= PV of FCF (2025 to inf)

= FCFn*(1+g) / (WACC - g)
where, g = growth rate of the firm
Val date 1st Dec 2020
Maturity 30th june 2030