Financial Modelling and Valuation: Exercise

Session One: In Class Exercise 1 Revenue

Modeling
Model revenue for the following companies:

Exercise 1: Revenue model with Fx component

A consumer company has previous year sales of Rs.100 crores. 40% of the company’s revenue is
earned from abroad. The company expects sales in abroad segment to increase by 15% and
revenue from domestic market to increase by 12%. The domestic currency is expected to
depreciate by 12% against a broad basket of foreign countries to which products are exported.

Exercise 2: Revenue model with inorganic growth

The above company has announced an acquisition of a new firm that is likely to be acquired by the
beginning of second half of the year. The acquired company is likely to Rs.20 crores revenue during
the year and the same is expected to grow by 10% the year after (the business is not cyclical).
Rework on the revenue model.

Exercise 3: Identifying revenue drivers

Boss Coffee pub, a chain of café, has approached to create a model that they can use to forecast
their future sales. They have provided you with the following information:

Annual sales: Rs.64,500 crores

No. of coffees sold per day: 1450 cups
Value of snacks sold during the year: Rs.26,500 crores
No. of cafes operating at the beginning of year: 45
No. of cafes operating at the end of year: 62

During your discussion with the company management, they also tell you that while the company’s
main product is coffee, they are not particular about what they sell as long as they make money.
They also mention that one of the primary reasons, why customers visit them is because the
ambience and facilities they provide at their café (such as lounge sofas and wifi connections).

As you further enquire, you are also told that the responsibility to run a cafe is basically upon the
café manager and the CEO’s current focus is mainly to increase the foot print of the café.

Build a revenue model for this company.

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Financial Modelling and Valuation: Exercise

Exercise 4: Identifying revenue drivers (Top-down vs bottom-up)

You are analysing the financials of TelAir, a company that you are interested in acquiring. TelAir, is
the biggest player in Iceland with c.70% market share and its operations are completely focused on
the same. As part of your analysis, you get to access the following information.

2007 2008 2009 2010 2011 2012

Total revenue (in millions) 600 624 638 645 656 665
% revenue 60% 62% 58% 57% 50% 50%
from calls
% revenue 40% 36% 35% 34% 32% 30%
from msg
% of revenue 0% 2% 7% 9% 18% 20%
from data
Avg. subscribers 555000 610000 616000 620000 623000 626000

As you were discussing with market experts about TelAir’s performance, they suggested that the
decline in speed of mobile penetration in the market is one of the major contributors to the decline
in growth rate. The mobile penetration rate in Iceland is at 65%. While the mobile penetration may
reach 70% in next five years, average consumption per user can increase by 5% each year. The
population of Iceland is estimated at 1.3 million.

Exercise 5: Order book driven business

RTech Ozonator is a company involved in construction of water treatment plant. The company
receives orders from various government, quasi-government and industrial clients to construct
water treatment plant. The company’s sales team is predominantly involved in procuring orders
which are then given to the project management team to execute. The company recognizes revenue
proportionately based on % of contract completed during a period. Given the typical order size the
company receives, it normally takes 2.5 years to complete a contract. The company received an
order worth $300 million last year. As at the end of the year, $280 million worth of order (including
those procured in prior years)_ were pending to be executed.

Build a revenue model for the company.

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Financial Modelling and Valuation: Exercise

Session One : In Class Exercise 2

Modelling Cash Costs
Exercise 1: Fixed Cost

A company incurs Rs.35 crores as rental towards it premises. The rental amount is expected to
remain flat for the next couple of years and is bound to increase in future.

Exercise 2: Variable cost

An automobile player procures certain component from his suppliers. The price of a component
negotiated upon is Rs.50 per unit. However, in case of the number of components procured exceeds
90000, then the supplier can be negotiated to reduce the price to Rs.40 per unit. The company
requires four units of the component per vehicle sold. The company sold 20,000 units of vehicle
last year.

Exercise 3: Step-fixed cost

A company currently has 40 production units with a total capacity of 500,000 units per month. The
current capacity utilization rate for the company is 80%. Each plant has optimum utilization rate
95%. If the company needs to produce beyond the optimum production rate, they may have take
up new facilities for each 15,000 units of output and each would have an incremental rent of
Rs.200,000 per month. The current rental expenditure is Rs.80,00,000/-

Exercise 4: Semi-variable cost

A company pays its sales manager Rs.50,000 in salary for every month. In addition, the sales
manager is entitled to a sales incentive of Rs.2,000 per vehicle sold in excess of his target of 500
units per year.

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Financial Modelling and Valuation: Exercise

Session One: In Class Exercise 3

Fixed Assets and Depreciation
IJ Enterprise has the following category of assets at the beginning of the year. Build a model for
fixed assets and forecast the closing balance based on details mentioned below.

Asset Gross Block Net Block Deprn Depreciatio

method n rate

Freehold property 600 480 WDV 5%

Land 400 400 None 0%
Plant & Machinery 550 350 SLM 25%

Capital Expenditure:

The company plans to construct a new factor premises on which it expects to incur Rs.300 crores
for the construction of the premises and Rs.120 crores towards plant and machinery. In addition,
the company is expected to incur replacement capex on plant and machinery to the tune of 25% of
its net block, each year.

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