Course: PGDM (Finance)  

Trimester IV
Div. Finance Grp 1/2/3   Marks 30
Date: 23rd September 2021   Time: 90 minutes
Subject: Corporate Valuation

INSTRUCTIONS:  
1.      Question No 1 is compulsory and carries 10 marks.
2.      From the remaining three questions answer any two. Each question carries 10 marks.

Q. No. 1 10 Marks (CO1, CO2, CO3,

CO4)

Riso Detergents is a low-cost producer of a good quality detergent brand called “RISO”. The
company was set up 12 years ago by A.P. Kumar. The Income Statement and Balance sheet for the
last year is as under:
Amt INR crores
Income Statement Balance Sheet
Revenues 900 Shareholders’ funds 500
(10 crores shares @ INR10 each)
PBDIT 209 Loans 200
Depreciation 45 700
PBIT 164
Interest 24 Net Fixed Assets 450
PBT 140 Net Current Assets 250
Tax 49 700
PAT 91

Since the company was consistently performing well, A.P Kumar plans to make the company
public and liquefy a portion of his holding. He approached Anjan Gupta from Global Capital an
Investment banking firm to help him estimate the worth of his shares. The company is currently
operating in western India, plans to set up a unit in Hyderabad in the next two years which would
improve the profits of the business. After getting details of capex plans, Anjan Gupta develops the
following forecast of operating profit and investment requirements for 6 years. Beyond year 6, it is
expected that the company would grow at a stable rate of 8% which can be applied to its free cash
flow as well.

Forecasted operating profit and investments

Year 1 2 3 4 5 6
Revenues 950 1000 1200 1450 1660 1770
PBDIT 195 200 210 305 330 374
Depreciation 55 85 80 83 85 87
 PBIT 140 115 130 222 245 287
Investment in Fixed Assets 100 250 85 100 105 120
Investment in net current assets 10 15 70 70 70 54

The current debt equity ratio is expected to be maintained. Pre-tax cost of debt is 12%. Tax rate is
35%, unlevered beta of similar publicly traded company is 0.9, risk free rate is taken at 5% and
risk premium at 7%. Tax rate is 25%

Calculate the DCF value of the firm and the value per share. Make suitable assumptions if
required.

Q. No. 2. 10 Marks (CO1,

CO4)

Apex Ltd has an invested capital of 500 million. Its ROCE is 18% and its weighted average cost of
capital is 14%. The expected growth rate in Apex’s revenues and invested capital will be 15% for
the first three years and 12% for the next two years.
a) Determine the intrinsic value of the enterprise using Economic Profit model. (5
marks)
b) Discuss the applicability of H Model in the context of corporate valuation.
(5 marks)

Q. No. 3. 10 Marks (CO2,

CO4)

Sasken Ltd reported sales of 1700 million for the y.e. 31/3/21 with a PAT of 181 million. Its
invested capital is 1314 million in equity (500 lakh shares @ INR 10/-) and 14 million in debt. It
proposes to use P/E, P/BV and P/Sales to get its imputed value. The relevant multiples of
comparable companies are as under:

Multiple Telelinks Ltd Datafast Ltd

P/E 25.6 12
P/BV 5.75 3.21
P/Sales 5.62 2.45

Determine the value per share of Sasken Ltd based on comparable companies. Sasken’s CMPS is
INR 200/-

Q. No. 4. Short notes (any two) 10 Marks

(CO1)
a) Critical Evaluation of EV/Sales v/s EV/BV multiples
b) Challenges in valuation of Private companies.
c) Sector specific multiples used in valuation
SECTOR-SPECIFIC MULTIPLES The value of a firm can be standardized using a number of sector-
specific multiples. The value of steel companies can be compared based on market value per ton of
steel produced, and the value of electricity generators can be computed on the basis of kilowatt
hour (kwh) of power produced. In the past few years, analysts following new technology firms have
become particularly inventive with multiples that range from value per subscriber for Internet
service providers to value per web site visitor for Internet portals to value per customer for
Internet retailers. Why Analysts Use Sector-Specific Multiples The increase in the use of sector-
specific multiples in the last few years has opened up a debate about whether they are a good way
to compare relative value. There are several reasons why analysts use sector-specific multiples:

■ They link firm value to operating details and output. For analysts who begin with these forecasts
—predicted number of subscribers for an Internet service provider, for instance—they provide a
much more intuitive way of estimating value. ■ Sector-specific multiples can often be computed
with no reference to accounting statements or measures. Consequently, they can be estimated for
firms where accounting statements are nonexistent, unreliable, or just not comparable. Thus, you
could compute the value per kwh sold for Latin American power companies and not have to worry
about accounting differences across these countries. ■ Though this is usually not admitted to,
sector-specific multiples are sometimes employed in desperation because none of the other
multiples can be estimated or used. For instance, an impetus for the use of sector-specific
multiples for new economy firms was that they often had negative earnings and little in terms of
book value or revenues. Limitations Though it is understandable that analysts sometimes turn to
sector-specific multiples, there are two significant problems associated with their use: 1. They feed
into the tunnel vision that plagues analysts who are sector focused, and thus they allow entire
sectors to become overpriced. A cable company