Name : Mohammed Nayeem Roll No-EMBA201917

Exam : Business Valuation

Question No-8 – Compare and Contrast DDM and FCFE

Ans:
DDM : The Divident discount model is used by the investors to measure value of a
stock. Is similar to the discounted cash flow valuation method.
FCFE : FCFE calculates the value of the firm’s equity. When the company’s capital
structure is stable, FCFE is the most suitable.
Question No-9 – Residual Income Model (RI)
Ans : The Residual income model attempts to adjust a firm’s future earnings
estimates to compensate for the equity cost and place a most accurate value of a
firm.
Formaula to calculate RI is : RI = Net income – ( Equity * Cost of Equity ).

Question No -10

Ans :
A) Net Operating Assets as on 31.03.2021

NOA = Net Operating Assets – Operating Liabilities

NOA = 420-120 = 300

Net Operating Assets as on 31.03.2021

NOA = 392-92 = 300

C ) Debt to equity ratio

D/E = Total Liabilities / Shareholder Equity

D/E = 370 / 1030 = 35% as on 31.03.2021
D/E = 322 / 936 = 34% as on 31.03.2020
 Question No – 11

Ans :

unlever
Ta ed beta
Compa Mark
Regressi D/E x for weight(un
ny et weight
on beta ratio rat each lev beta
name cap
e  Cpmpa
ny
20 10.00
X 1.776 60% 1000 1.2 0.12
% %
20 50.00
Y 1.2 25% 5000 1 0.5
% %
20 40.00
Z 1.584 40% 4000 1.2 0.48
% %
1000 100.00
Total   1.1
0 %
35.00
D/E of the firm          
%
Tax 20.00
           
rate %
               
Calculation            
bottom up beta for the Industry 1.1      
1.40
Levered beta of the firm         
8

Question No 12 :
Ans :
A)
A bottom-up beta is estimated by starting with the businesses that a firm is in,
estimating the fundamental risk or beta of each of these businesses and taking a
weighted average of these risks.
Adjust the business beta for the operating leverage of the firm to arrive at the
unlevered beta for the firm. total costs) should have lower unlevered betas. If you
can compute fixed and variable costs for each firm in a sector, you can break
down the unlevered beta into business and operating leverage components.
D)
 Estimating cost of Debt in various scenario
The cost of debt is the return that a company provides to its debt holders and
creditors. These capital providers needs to be compensated for any risk exposure
that comes with lending to a company.
Since observable interest rate plays a big role in qualifying the cost of debt, it is
relatively most straightforward to calculate the cost f debt than the cost of equity.
Not only does the cost of debt reflects the default risk of a company but it also
reflects the level of interest rates in the market.

G )Consistency in inputs in valuation using different models

5 Common Business Valuation Methods

1. Asset Valuation. Your company's assets include tangible and intangible items.
2. Historical Earnings Valuation. ...
3. Relative Valuation. ...
4. Future Maintainable Earnings Valuation. ...
5. Discount Cash Flow Valuation.

There are three inputs that are required to value any asset in this model - the
expected cash flow, the timing of the cash flow and the discount rate that is
appropriate given the riskiness of these cash flows.

C ) TAX Shield

The M&M Theorem, or the Modigliani-Miller Theorem, is one of the most important
theorems in corporate finance. The theorem was developed by economists Franco
Modigliani and Merton Miller in 1958. The main idea of the M&M theory is that
the capital structure of a company does not affect its overall value.

The first version of the M&M theory was full of limitations as it was developed under
the assumption of perfectly efficient markets, in which the companies do not pay
taxes, while there are no bankruptcy costs or asymmetric information. Subsequently,
Miller and Modigliani developed the second version of their theory by including taxes,
bankruptcy costs, and asymmetric information.

APV : Adjusted present value :

APV is the NPV of a project or company if financed solely by equity plus the present
value of financing benefits. APV shows an investor the benefit of tax shields from
tax-deductible interest payments. It is best used for leverage transactions, such as
leveraged buyouts, but is more of an academic calculation.

WACC : Weighted average cost of capital :

A firm’s Weighted Average Cost of Capital (WACC) represents its blended cost of
capital across all sources, including common shares, preferred shares, and debt.