SL2 - Corporate Finance Risk Management - December 2020

SUGGESTED SOLUTIONS
SL2- Corporate Finance

&
Risk Management
Special Online Examination
December 2020
All Rights Reserved

All Rights Reserved
SECTION 1
Question 01
(a)
Relevant learning outcome/s: 1.1.3

Study text reference: Pages 4 – 6
Profit maximisation vs wealth maximisation
The key difference between ‘maximisation of profits’ and ‘maximisation of wealth’ is that profit focus
is on short-term earnings, whilst wealth focus is on increasing shareholder value of the business.
Profit maximisation Wealth maximisation

Timeline Short-term/Increase in profits Long-term/Increase in
shareholder value
Discretionary May opt to reduce discretionary Would invest in marketing,
expenses expenses in advertising, research, spend on research to create
training etc. long-term value
Pricing strategy Increase selling prices to Look at more sustainable
maximise profits in the short-term pricing to attract and
maintain customers in the
long-term
Risk management Since the focus is on cutting down Would invest and spend on
expenses, the investment on risk risk mitigation
mitigation is low
Production capacity Optimum production capacity to Invest in expansion of
maximise short-term profits production capacity for
long-term wealth creation
(b) (i)
Relevant learning outcome/s: 3.1.2, 4.1.7, 4.2.1 and 4.2.2

Study text reference: Pages 141 – 163, 255, 304 – 305
Land: Rs. 4,800 million
Building floor area

Residential: 350,000 sq. ft
Commercial: 350,000 sq. ft
Residential building cost: USD 90 per sq. ft

Commercial building cost: USD 60 per sq. ft
SL2 – Suggested Solutions Page 2 of 19
December 2020: Special Online Examination
Year 1 Year 2 Year 3 Total
(Rs. million)
Land cost 4,800
30% 45% 25%
Residential building cost (USD) 9,450,000 14,175,000 7,875,000
USD/LKR 185 194.25 203.96
Residential building cost (Rs.) 1,748,250,000 2,753,493,750 1,606,204,688 6,108
Commercial building cost (USD) 6,300,000 9,450,000 5,250,000

USD/LKR 185 194.25 203.96
Commercial building cost (Rs.) 1,165,500,000 1,835,662,500 1,070,803,125 4,072
Total cost 14,980

Y0 Y1 Y2 Y3 Y4 Y5 Total
(Rs. million)
25% 40% 35% 100%
Residential sales 2,750 4,400 3,850 11,000
10% 20% 20% 25% 25% 100%

Commercial sales 875 1,750 1,750 2,187.5 2,187.5 8,750
Total revenue 3,625 6,150 5,600 2,187.5 2,187.5 19,750
Residential building cost (1,748) (2,753) (1,606) (6,108)

Commercial building
cost (1,166) (1,836) (1,071) (4,072)
Operating cash flows 711 1,561 2,923 2,188 2,188 9,570

Land cost (4,800)
Discount factor (14%) 1.000 0.877 0.769 0.675 0.592 0.519
Discounted cash flows (4,800) 624 1,200 1,973 1,295 1,135
Project NPV 1,427
Project WACC
(1,000/4,800) * 0.18 +
(3,800/4,800) * 0.13
0.0375 + 0.1029
= 14.04%
Residential No. of apartments Price per Apartment total sales

apartment (Rs. million)
(Rs. million)
Floors 1 – 15 90 50 4,500
Floors 16 – 35 100 65 6,500
190 11,000
Commercial sales 8,750
Total sales 19,750

(ii)
To: The Board of Directors of Prudential Bank

From: Financial Consultant
Subject: Project Serene Builders – Galle Face
Date: December 2020
Dear Sirs,
On review of the project, it appears that this mixed development is financially viable with a project
NPV of Rs. 1,427 million. The strategic location Galle Face and the past track record of Serene Builders
are all plus points too. However, the key assumption is that both commercial and residential towers
could be sold in Year 1. As such, ideally, we may have to obtain independent advice from a real estate
specialist on the demand and supply trends. Hence, we have to determine the sensitivity of the
project NPV vis-à-vis the % sales of the residential and commercial apartments/total available
apartments.
Attention should also be drawn to the commercial tower, where the developer is planning to sell each
floor to commercial clients. The question arises whether there would be sufficient corporates locally
in Sri Lanka to fill in this tower. Therefore, we may need to obtain the detailed marketing plans of
Serene Builders regarding the interest of foreign investors, and the % of foreign to % local investors
taking up floors. With the prevailing COVID-19 pandemic, although the interest would be quite
dampened, in time to come Sri Lanka would be an attractive commercial hub in South Asia.
In relation to the construction cost, we need to obtain more details pertaining to imported material,
local resources, labour requirement etc. Any undue delays in construction would have a negative
impact on the project’s viability.
The macro-economic fundamentals of Sri Lanka, interest rates, inflation, USD/LKR movement and
the political stability would be vital for the success of this project.
It is recommended that Prudential Bank obtains mortgage rights for the entire property, and a
corporate guarantee from Serene Builders.
Therefore, it is suggested to further evaluate the key marketing and construction cost assumptions.
Kind regards,
……………………….
(Total: 25 marks)

Question 02

(a) (i)
E(RA) = 13.80% (16.9% * 0.5 + 12.5% * 0.3 + 8.00% * 0.2)

E(RB) = 12.60% (22.50% * 0.5 + 8.00% * 0.3 – 5.25% * 0.2)
E(RC) = 14.36% (20.4% * 0.5 + 11.70% * 0.3 + 3.25% * 0.2)
√(16.9% − 13.8%)2 ∗ 0.5 + (12.5% − 13.8%)2 ∗ 0.3 + (8% − 13.8%)2 ∗ 0.2

σA =
= 3.47%
√(22.5% − 12.6%)2 ∗ 0.5 + (8.0% − 12.6%)2 ∗ 0.3 + (−5.25% − 12.6%)2 ∗ 0.2

σB =
= 10.91%
σC = √(20.4% − 14.36%)2 ∗ 0.5 + (11.7% − 14.36%)2 ∗ 0.3 + (3.25% − 14.36%)2 ∗ 0.2

= 6.71%
Cov AB = 0.3785%
Cov BC = 0.7323%
Cov AC = 0.2329%
Amount to be
invested
Portfolio (Rs. million) Total Weight
AB 100 150 250 0.40 0.60
BC 150 100 250 0.60 0.40
AC 50 200 250 0.20 0.80
ERP AB = 13.08%
ERP BC = 13.30%
ERP AC = 14.25%

σP(A&B) = √0.42 ∗ 0.03472 + 0.62 ∗ 0.10912 + 2 ∗ 0.4 ∗ 0.6 ∗ 0.003785
= 7.93%
σP(B&C) = √0.62 ∗ 0.10912 + 0.42 ∗ 0.06712 + 2 ∗ 0.6 ∗ 0.4 ∗ 0.007323
= 9.23%
σP(A&C) = √0.22 ∗ 0.03472 + 0.82 ∗ 0.06712 + 2 ∗ 0.2 ∗ 0.8 ∗ 0.002329
= 6.06%
Windcare (Pvt) Ltd should invest Rs. 50 million in Security A and Rs. 200 million in Security C as it
gives a return of 14.25% and a standard deviation of 6.06%.
(ii) It is possible for Windcare (Pvt) Ltd to diversify away the unsystematic risk (industry specific
risk) by investing in a portfolio. As a rational risk averse investor, Windcare (Pvt) Ltd will be
able to diversify away as much risk as possible and therefore hold the market portfolio of
shares; that is a portfolio containing every share in the market. Then that portfolio contains
zero unsystematic risk.
However, some risk would remain even in a perfectly diversified equity portfolio. This is
known as systematic risk and it can never be removed from a portfolio. Windcare (Pvt) Ltd
will be able to minimise the unsystematic risk or bring it to zero by diversifying.
Relevant learning outcome/s: 2.2.9 and 2.2.10

(b)
Net profit after tax (2020) (Rs.) 138,000,000

No. of shares issued 50,000,000
Proposed dividend payout 50%
Earnings per share (EPS) for 2020
= 138,000,000/50,000,000 Rs. 2.76
Year EPS (Rs.) Dividend payout ratio DPS (Rs.)

2016 1.80 60% 1.08
2017 2.10 55% 1.16 Growth
2018 2.45 50% 1.23 0.00%
2019 2.50 52% 1.30 6.94%
2020 2.76 50% 1.38 6.06%
Dividend growth rate based on geometric mean
1.38 = 1.08(1+g)^4
(1+g)^4 = 1.280
1 + g = 1.0632
G = 6.32%
Dividend growth rate (2020) = 6.32%
COVID reduction = 1%
Growth after reduction = 5.32%
Required rate of return = 13%
Additional risk premium = 2%
Adjusted required rate of return = 15%
Y0 Y1 Y2 From Y3
Growth rate 5.32% 5.32% 4.00%
DPS (Rs.) 1.38 1.45 1.53 1.59
Annuity to infinity 9.091
PV at Y2 14.47
DF at 15% 1.000 0.870 0.756 0.756
PV 1.38 1.26 1.16 10.94
Value of a share (Rs.) 14.74
Market price (Rs.) 18.75
Therefore, value of a share < market price
The market price of Leema PLC is overpriced. Hence it is not recommended to invest in the shares of
Leema PLC.
Alternative answer
Value per share (intrinsic value per share) is less than the market price of Leema PLC. Hence, it is
over-priced and some investors may not invest in this company. However, by looking at the
profitability, growth rate and the retention ratio of the company, investors may expect a reasonable
increase in value in the future. Therefore, investors may decide to invest in the shares of the company
by looking at the future better prospects of the company.
In addition, the dividend growth model has its own limitations. Thereby it may not provide an
accurate value per share of the company. The actual value of the company would have either
increased or decreased. Thus, a risk-taking investor (a risk taker) may invest in these shares
irrespective of the value per share using the dividend growth model. Therefore, it totally depends on
the risk appetite of the investor.
(Total: 25 marks)

SECTION 2
Question 03
Relevant learning outcome/s: 2.2.4, 4.1.7 and 4.1.6

Study text reference: Pages 106, 114, 163, 246, 255 and 164
(a) The independent share valuation based on the DCF method
Value per share

Total company value (Rs. million) 11,705
Less: Debt (Rs. million) (2,106)
Value attributable to equity shareholders (Rs. million) 9,599
No. of shares available (million) 596
Value per share (Rs.) 16.11
The value per share is Rs. 16.11 and the value range given is acceptable.
W1: Operating expenses and working capital
Y0 Y1 Y2 Y3 Y4 Y5
Rs. million
Cumulative growth in operating expenses 102% 102% 104% 104% 105%

and operating profit
Total operating expenses 8,334 8,501 8,671 9,018 9,378 9,847
Working capital 2,084 2,125 2,168 2,254 2,345 2,462

W2: Free cash flow statement
Y0 Y1 Y2 Y3 Y4 Y5
Rs. million
Operating profit 2,955 3,014 3,074 3,197 3,325 3,491
Depreciation and amortisation 1,667 1,700 1,734 1,804 1,876 1,969
Change in working capital (42) (43) (87) (90) (117)
Capital expenditure (2,000) (2,100) (2,500) (2,900) (3,700)
Income tax (754) (769) (799) (831) (873)
Free cash flows 1,919 1,897 1,615 1,379 771
Terminal value 9,924
Total cash flows 1,919 1,897 1,615 1,379 10,695
Discount factor (11%) 1 0.9009 0.8116 0.7312 0.6587 0.5935

Present value 1,729 1,540 1,181 909 6,347
NPV 11,705

W3: WACC
Capital structure Rs. million % Cost WACC

Equity 12,731 86% 11% 9.44%
Debt 2,106 14% 8% 1.14%
14,837 10.6%
Approximately, WACC = 11%
Cost of debt
Cost of debt = 8%
Cost of equity
Company
Debt-to-equity ratio
Debt Equity Total

2,106 12,731 14,837
14% 86%
Target company (ABX PLC)

Debt-to-equity ratio
Debt Equity
50% 100%
Beta = 1.10
Unlevered beta
Unlevered beta = Levered beta / (1 + [(1 – Tax rate) * (Debt/Equity)]

= 1.10 / (1 + [(1 – 0.28) * (50/100)]
= 1.10 / 1.36
= 0.81

Levered beta
Levered beta = Unlevered beta * [(1 + (1 – Tax rate) * (Debt / Equity)]

= (0.81 * [(1 + (1 – 0.28) * (14/86)]
= 0.90
Cost of equity
Risk free rate 5%

Market rate 12%
Risk premium 7%
RRR 11.33%
Approximately, cost of equity = 11%
W4: Terminal value
End of Y5 cash flow 771

Growth rate 3%
End of Y6 cash flow 794
NPV at the beginning of Y6 9,924 CF/(r-g)
Key reasons
The key reason for the varying business valuation result is largely a timing difference in our opinion
as further explained below.
The market-based valuation was carried out somewhere in February 2020 when the business
environment was quite stable, and businesses were operating as usual. Therefore, the market had
placed a reasonably higher value of Rs. 33 per share compared to its book value. This may be due to
the company’s potential in the future, and it could have also been a representation of the company’s
brand value arising from a great track record and an experienced management team.
However, starting in March 2020, the COVID-19 outbreak created uncertainty in every business
segment but specifically in the leisure and global logistic sectors. Therefore, the overall business
valuation must have come down in almost all the business enterprises and this may be further
evident by the low all share price index during the period.
The company carried out its DCF valuation post-outbreak but it was just before the second wave in
Sri Lanka occurred. Therefore, the cash flows predicted must have obviously factored for uncertainty,
which has resulted in unfavorable cash flows. On the other side it is never recommended to carry out
a DCF valuation during uncertain times as cash flow predictions will run long into the future.
Therefore, a company’s attempt to compare a market-based valuation carried out during a stable
period with a DCF valuation carried out during an unstable period does not make sense.

In addition, the DCF valuation is based on assumptions and estimations, and the value of the company
depends on the reliability of such assumptions and estimations used.
For example, working capital which is computed at 125% of depreciation and amortisation seems
unrealistic.
Further, theoretically the market-based valuation may be different to the DCF valuation even for the
same period under review due to the following reasons.
1. Selection of an identical listed peer company (or companies) is not possible. It is an

approximation only. Each company has its dynamics and future potential/risk, which you may
never match.
2. A market-based valuation would be sensitive to current affairs and events but a DCF valuation
method would NOT be very sensitive to current events or affairs. However, it would consider
a longer time horizon.
3. Most key decisions and information of a company may not be made public until they are ready
to be published. However, such information may have a huge impact on the company’s value
creation. The DCF method will factor such information in its valuation but the market-based
valuation will not, as it does not possess such information as yet.
(b)
Relevant learning outcomes/s: 3.1.2

Study text reference: Pages 163 and 164
The value creation arising from the mega project is Rs. 3.9 billion. We need to look at how much of
this would be attributable to equity shareholders. We have not been given the additional debt raised
for the new project. Hence, we are not in a position to make a solid comment as to how much would
be attributed to ordinary shareholders.
Therefore, it does necessarily mean there will be an increase in the share price unless there is some
leftover for ordinary shareholders after deducting the debt amount from the value created for the
enterprise.

Revenue Rs. million
Type 1 10,000
Type 2 3,125
Annuity factor (1 – 15 years): 7.6061
Develop
A. 22,176.25
Succeed (75%)
14,342.79 15,000
Type 1 (60%) 7,500 B. (9,157.59)
6,243.54 Abandon
Succeed (70%) Fail (25%) C. (9,158.00)
3,995.48 Develop
D. (2,435.70)
Test (5,905.33)
Succeed (40%)
Type 2 (40%) 12,500
2,500
6,250
E. (8,218.40)
1,250 Fail (30%) Abandon
Fail (60%)
F. (8,218.40)
Abandon 0%)
G. (1,250.00)

Y0 Y1 Y3 Y7
Node A
CF (1,250.00) (2,500.00) (7,500.00) 61,060.80
Discount factor (10%) 1.000 0.909 0.751 0.513
PV (1,250.00) (2,272.73) (5,634.86) 31,333.84
NPV 22,176.25
Node B
CF (1,250.00) (2,500.00) (7,500.00)
Discount factor (10%) 1.00 0.91 0.75
(1,250.00) (2,272.73) (5,634.86)
NPV (9,157.59)
Node C
CF (1,250.0) (2,500.0) (7,500.0)
Discount factor (10%) 1.00 0.91 0.75
(1,250.0) (2,272.7) (5,634.9)
NPV (9,157.6)
Node D
CF (1,250.0) (2,500.0) (6,250.0) 11,269.0
Discount factor (10%) 1.00 0.91 0.75 0.51
(1,250.0) (2,272.7) (4,695.7) 5,782.8
NPV (2,435.7)
Node E
CF (1,250.0) (2,500.0) (6,250.0)
Discount factor (10%) 1.00 0.91 0.75
(1,250.0) (2,272.7) (4,695.7) -
NPV (8,218.4)
Node F
CF (1,250.0) (2,500.0) (6,250.0)
Discount factor (10%) 1.00 0.91 0.75
(1,250.0) (2,272.7) (4,695.7) -
NPV (8,218.4)
Node G
CF (1,250.0)
Discount factor (10%) 1.00 0.91
(1,250.0) - - -
NPV (1,250.0)
The value of Rs. 4 billion created by the new mega project is acceptable.

(c)
Relevant learning outcome/s: 4.2,4, 4.1.14 and 4.1.8

Study text reference: Pages 255, 280 – 290, 304 and 305
(i)
Some key points for the management’s attention.
1. The project finance cash outflows should match the project revenue. In other words,
short/medium term projects can be financed with short/medium term financing and long-term
projects should be financed with long-term financing.
Relevance: The special feature of the said mega project is that no inflows can be expected for the
first 7 years. However, if the company decides to go ahead mainly with debt financing, there is a
big question as to how the first 7-year loan servicing is going to be possible.
2. The company should move to an optimal capital structure. The present capital structure of the
company is heavily equity financed. Therefore, adding more debt into the capital structure
would reduce the WACC.
Therefore, the company could absorb more debt into its capital structure in order to bring down
the WACC. However, there is going to be a major mismatch between revenue cash flows and
project financing cash flows. Therefore, the company should make a call if the debt providers
are prepared to allow a grace period and if so what the cost of the debt would be.
(ii) The existing shareholders may have understood the following implications on HCL in the
event they undertake the new project under HCL.
 The beta factor of HCL would go up and it would lead to an increase in WACC. This means
a lower business valuation.
 The company may run into a liquidity trap in trying to finance the mega project.
Therefore, there may be another burden to group cash flows on top of the existing
problematic SBUs (leisure & travel, logistics, energy and power).
 The business valuation of HCL will heavily depend on the success of the new project. In
other words, HCL will get into a volatile situation.
 New investors will have to join with a large proportion of capital that would in turn allow
them to control the current operations of HCL.
 The mega project seems to be of high risk. The current volatile macro environment has
generated adequate risks to business and the said project could be a risk multiplier.

(d)

Analysis of each SBU
Leisure & travel Logistics Power & energy
2020 2019 2020 2019 2020 2019

Rs. million
Net profit ratio Net profit
1 (before tax) (before tax) 75 (17) (25) (10) (19) (18)
Sales 3,846 3,115 2,564 2,002 1,923 1,335
Net profit ratio 2.0% -0.5% -1.0% -0.5% -1.0% -1.3%
2 Return on assets Net income 75 (17) (25) (10) (19) (18)

Total assets 2,167 1,980 1,577 1,288 1,607 1,640
Return on
assets 3% -1% -2% -1% -1% -1%
Total assets to
Total liabilities
3 liabilities 1,056 839 1,749 1,438 1,652 1,334
Total assets 2,167 1,980 1,577 1,288 1,607 1,640
Total assets to
liabilities 49% 42% 111% 112% 103% 81%
Interest coverage
EBIT
4 ratio 152 32 26 22 19 3
Interest 76 49 51 32 38 21
Interest
coverage ratio 2.00 0.65 0.51 0.69 0.48 0.15

Analysis
In 2020, all the SBUs except for leisure & travel reported a negative net profit ratio before tax. It can be reasonably assumed that all of them will report
sizable negative NP ratios after tax.
On the other hand, the return on assets for each SBU was either negative or very marginal. Once again, after tax, the return on assets will be zero.
By looking at the above ratios, it can be concluded that each SBU does not provide justice to HCL for the assets deployed into the business. Further, each
SBU has failed to manage its expenses compared to revenue. Therefore, all the SBUs have shown very unsatisfactory results.
The leisure & travel sector shows an acceptable ratio between assets and liabilities. All the other SBUs indicate an unfavorable position.
The interest coverage ratio indicates that all the SBUs (except for leisure & travel in 2020) cannot even cover their interest expense for the year.
Therefore, we can arrive at the conclusion that none of the SBUs show any indication of being a going concern unless the management has any
information to say otherwise.
Qualitative concerns
The leisure & travel and logistics sectors are about to experience a largely negative impact post COVID-19. You should bear in mind that the current
status is not related to any impact arising from COVID-19 therefore with the pandemic effect the negative impact is going to be quite significant.
However, the company may reconsider the power & energy SBU, given the current situation in the country where the demand for renewal energy may
go up. Therefore, close attention is needed before making a call.
(Total: 50 marks)

Notice of Disclaimer
The answers given are entirely by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka)
and you accept the answers on an "as is" basis.
They are not intended as “Model answers’, but rather as suggested solutions.
The answers have two fundamental purposes, namely:
1. to provide a detailed example of a suggested solution to an examination question; and
2. to assist students with their research into the subject and to further their understand ing and
appreciation of the subject.
The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) makes no warranties with respect
to the suggested solutions and as such there should be no reason for you to bring any grievanc e
against the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka). However, if you do
bring any action, claim, suit, threat or demand against the Institute of Chartered Accountants of Sri
Lanka (CA Sri Lanka), and you do not substantially prevail, you shall pay the Institute of Chartered
Accountants of Sri Lanka's (CA Sri Lanka’s) entire legal fees and costs attached to such action. In
the same token, if the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) is forced to
take legal action to enforce this right or any of its rights described herein or under the laws of Sri
Lanka, you will pay the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) legal fees
and costs.
© 2013 by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka).
All rights reserved. No part of this document may be reproduced or transmitted in any form or by
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Strategic Level 2 - Special Online Examination December 2020

SL2 - Corporate Finance Risk Management - December 2020

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SUGGESTED SOLUTIONS

SL2- Corporate Finance

All Rights Reserved

Relevant learning outcome/s: 1.1.3

Profit maximisation vs wealth maximisation

Profit maximisation Wealth maximisation

Relevant learning outcome/s: 3.1.2, 4.1.7, 4.2.1 and 4.2.2

Land: Rs. 4,800 million

Building floor area

Residential building cost: USD 90 per sq. ft

Commercial building cost (USD) 6,300,000 9,450,000 5,250,000

Commercial building cost (Rs.) 1,165,500,000 1,835,662,500 1,070,803,125 4,072

Total cost 14,980

SL2 – Suggested Solutions Page 3 of 19

10% 20% 20% 25% 25% 100%

Total revenue 3,625 6,150 5,600 2,187.5 2,187.5 19,750

Residential building cost (1,748) (2,753) (1,606) (6,108)

Operating cash flows 711 1,561 2,923 2,188 2,188 9,570

Residential No. of apartments Price per Apartment total sales

SL2 – Suggested Solutions Page 4 of 19

To: The Board of Directors of Prudential Bank

SL2 – Suggested Solutions Page 5 of 19

Relevant learning outcome/s: 5.1.6

E(RA) = 13.80% (16.9% * 0.5 + 12.5% * 0.3 + 8.00% * 0.2)

√(16.9% − 13.8%)2 ∗ 0.5 + (12.5% − 13.8%)2 ∗ 0.3 + (8% − 13.8%)2 ∗ 0.2

√(22.5% − 12.6%)2 ∗ 0.5 + (8.0% − 12.6%)2 ∗ 0.3 + (−5.25% − 12.6%)2 ∗ 0.2

σC = √(20.4% − 14.36%)2 ∗ 0.5 + (11.7% − 14.36%)2 ∗ 0.3 + (3.25% − 14.36%)2 ∗ 0.2

SL2 – Suggested Solutions Page 6 of 19

σP(B&C) = √0.62 ∗ 0.10912 + 0.42 ∗ 0.06712 + 2 ∗ 0.6 ∗ 0.4 ∗ 0.007323

σP(A&C) = √0.22 ∗ 0.03472 + 0.82 ∗ 0.06712 + 2 ∗ 0.2 ∗ 0.8 ∗ 0.002329

Relevant learning outcome/s: 2.2.9 and 2.2.10

Net profit after tax (2020) (Rs.) 138,000,000

Year EPS (Rs.) Dividend payout ratio DPS (Rs.)

SL2 – Suggested Solutions Page 8 of 19

Relevant learning outcome/s: 2.2.4, 4.1.7 and 4.1.6

(a) The independent share valuation based on the DCF method

Value per share

No. of shares available (million) 596

Value per share (Rs.) 16.11

Cumulative growth in operating expenses 102% 102% 104% 104% 105%

SL2 – Suggested Solutions Page 9 of 19

Discount factor (11%) 1 0.9009 0.8116 0.7312 0.6587 0.5935

SL2 – Suggested Solutions Page 10 of 19

Capital structure Rs. million % Cost WACC

Approximately, WACC = 11%

Debt Equity Total

Target company (ABX PLC)

Unlevered beta = Levered beta / (1 + [(1 – Tax rate) * (Debt/Equity)]

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Levered beta = Unlevered beta * [(1 + (1 – Tax rate) * (Debt / Equity)]

Risk free rate 5%

Approximately, cost of equity = 11%

W4: Terminal value

End of Y5 cash flow 771

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1. Selection of an identical listed peer company (or companies) is not possible. It is an

Relevant learning outcomes/s: 3.1.2

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Annuity factor (1 – 15 years): 7.6061

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Relevant learning outcome/s: 4.2,4, 4.1.14 and 4.1.8

Some key points for the management’s attention.