CHRIST INSTITUTE OF MANAGEMENT, LAVASA

END TRIMESTER EXAMINATION –JUNE,2021

IV TRIMESTER – MBA

Sub code: MBA442F Max. Marks: 30

Sub: BUSINESS VALUATION Duration: 90 MINS.
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ATTEMPT ANY THREE QUESTIONS. ALL QUESTIONS CARRY 10 MARKS EACH.

1. Fifteen years ago, Manish Kothari set up a company called Manish Detergents to make
detergent powder. After few years of teething problems, the company established itself as a
low-cost producer of good quality detergent powder branded as Manna. For the last decade,
Manish detergents has grown profitably. The profit and loss account for year 0 (the year that
just ended) and the balance sheet at the end of year 0 for Manish Detergents are given below:
-

Financials of Manish Detergent

Profit and Loss Account Balance Sheet

millions

Revenues 900 Capital & Liabilities

EBITDA 209 Shareholders' Funds 500

Depreciation 45 Loans 200

EBIT 164 Total 700

Interest 24 Assets

EBT 140 Net Fixed Assets 450

Tax 49 Net Current Assets 250

EAT 91 Total 700

The paid-up capital of Manish Detergents is 100 million divided into 10 million shares of
10 each. All the shares are presently held by Manish Kothari, who is planning to take the
company public by selling 4 million of his existing shares. The purpose of the issue is to
enable Manish Kothari to liquidate a portion of his equity. Once the equity of Manish
Detergents is listed, it will help the company in raising capital from the market as and
when required in the future.
Manish Kothari called Ajay Kapoor, vice president of Indus Capital, a merchant banking
firm, to help him in estimating the worth of his shares.
Ajay Kapoor asked Manish Kothari to spell out his plans for the next 5 to 10 years,
develop the forecast for financial performance and investment requirements, and indicate
his target debt-equity ratio.
Manish Detergents is currently operating mainly in western India but it has definite plans
to set up a unit in Hyderabad in the next two years to serve the southern market. This will
require substantial investment in factory, godowns, and current assets. Since this
investment will take some time to start yielding results, Manish expects a short-term dip
in profits. However, once the southern venture takes off, Manish is confident that profits
will improve.
Taking into account the above, Manish Kothari has developed forecasts of operating
profit and investment requirements which are given in following table. Beyond year 6, he
expects that Manish Detergents will grow at a steady state of 10 percent and this will
apply to its free cash flow as well.

Financial Forecasts

Part A: Forecasted Operating Profit (millions)

Particulars Years

  1 2 3 4 5 6

Revenues 950 1000 1200 1450 1660 1770

EBITDA 195 200 210 305 330 374

Depreciation 55 85 80 83 85 87

EBIT 140 115 130 222 245 287

Part B: Forecasted Investments (millions)

Gross investments in fixed assets 100 250 85 100 105 120

Investments in net current assets 10 15 70 70 70 54

Total 110 265 155 170 175 174

Manish Kothari is happy with the present debt-equity ratio of 0.4:1.00 and plans to keep
it that way only. Ajay Kapoor has come up with the following estimates:
 Tax rate – 35 percent
Pre-tax cost of debt for Manish Detergents – 12 percent
Cost of equity – 16.48 percent
Required:
1.Calculate the DCF Value of the Firm
2.Calculate the value of the equity, assuming that the market value of debt is the same as
its book value.

2. Madhu Corporation has the following book value capital structure:

Equity capital (30 million shares, Rs.10 par) Rs.300 million

Preference capital, 15 percent (1,000,000 shares, Rs.100 par) Rs. 100 million
Retained earnings Rs. 100 million
Debentures 11 percent (2,500,000 debentures, Rs.100 par) Rs .250 million
Term loans, 13 percent Rs. 300 million
Rs.1050 million

The next expected dividend per share is Rs.4.00. The dividend per share is expected to
grow at the rate of 15 percent. The market price per share is Rs.80. Preference stock,
redeemable after 6 years, is currently selling for Rs.110 per share. Debentures,
redeemable after 6 years, are selling for Rs.102 per debenture. The tax rate for the
company is 35 percent.

Calculate the average cost of capital using

(i) book value proportions, and
(ii) market value proportions
3. The profit and loss account and balance sheet of a company for two years (1 and 2) are given
below. Assume a tax rate of 30 percent for year 2.

Profit and Loss Account 1 2

 Net sales 40,000 50,000
 Income from marketable securities 800 1,000
 Non-operating income 600 1,000
 Total income 41,400 52,000
 Cost of goods sold 25,000 30,000
  Selling and administrative expenses 6,000 7,200
 Depreciation 2,400 3,000
 Interest expenses 2,500 2,600
 Total costs and expenses 35,900 42,800
 PBT 5,500 9,200
 Tax provision 1,500 2,700
 PAT 4,000 6,500
 Dividends 1,400 1,800
 Retained earnings 2,600 4,700
Balance Sheet
 Equity capital 6,000 6,000
 Reserves and surplus 10,000 14,700
 Debt 16,000 19,300
32,000 40,000
 Fixed assets 20,000 24,500
 Investments (marketable securities) * 7,000 8,500
 Net current assets 5,000 7,000
32,000 40,000
*
All of this represents excess marketable securities

(i) What is the EBIT for year 2?

(ii) What is the tax on EBIT for year 2?
(iii) What is the FCFF for year 2?

4. You are looking at the valuation of a stable firm, Solidaire Limited, done by an investment
analyst. Based on an expected free cash flow of Rs.70 million for the following year and an
expected growth rate of 10 per cent, the analyst has estimated the value of the firm to be
Rs.3000 million. However, he committed a mistake of using the book values of debt and
equity. You do not know the book value weights employed by him but you know that the
firm has a cost of equity of 22 per cent and a post-tax cost of debt of 9 per cent. The market
value of equity is twice its book value, whereas the market value of its debt is eight -tenths of
its book value. What is the correct value of the firm?