JGU Id. No.

_____________

End-term Examination
MBA-DFB – C2
Financial Management and Valuation

MAXIMUM MARKS: 50 TIME: 7 Days

Answer: 1

The model was used to complete the valuation, which necessitated the reconstruction of the
financial statements as well as the computation of significant financial indicators like net
operating profit after tax (NOPAT) and free cash flow to the business. Following the method,
an appraisal of the value of the business was performed.

With the use of the following formula, one may calculate NOPAT: In its simplest form,
NOPAT stands for net income before taxes (EBIT minus taxable income).

NOPAT is added to the increase in CAPEX and the increase in current assets to calculate
FCFF.

During the whole of the first stage, which is also referred to as the fast growth phase, it was
determined whether or not it was necessary to provide an explicit prediction of the stage's
unlevered free cash flows. The reason for this is that both the company's sales and earnings
have been on the increase recently.

In addition, the findings of the second stage of calculations show that, when seen from a more
holistic perspective, the increase has reached a level of stability. In actual practise, the
equation that is employed is as follows:

The sum total of a firm's current operating income and its anticipated capital expenditures is
what determines the value of that corporation.

PV stands for present value.

TV = Terminal value

FCFF, which stands for flows of freely accessible currency

Both the two-stage model and the three-stage model predict the occurrence of a developing
phase and a stable phase, which is one similarity between the two models. In parallel with
these two phases, another phase known as the transitional one takes place. There is a pause
that occurs between the period of rapid expansion and the phase of stable growth.

End-term Examination –Fall’2022, JGBS Page 1

The valuation of the company taking into account three distinct phases of expansion: an early
stage characterised by rapid expansion, an intermediate stage characterised by contracting
expansion, and a concluding stage characterised by uninterrupted expansion.

Assumptions
• It is presumed that the company is now through an exceptionally rapid expansion phase.

• It is anticipated that this tremendous increase will continue for an initial time period that
has to be indicated.

• The growth rate will slow down in a linear fashion throughout the time of transition to a
stable growth rate.

• The link between expenditures on capital assets and depreciation is dynamic, shifting in
response to changes in the pace of economic growth.

General inputs:

Current Earnings ₹ 11,342.00

Current Dividends ₹ 4,300.00
Current Capital Spending ₹ 3,167.00
Current Depreciation ₹ 3,522.00
Current Revenues ₹ 1,60,341.00
Working Capital ₹ 34,872.00
Chg. Working Capital ₹ 1,195.00

It is estimated that this project's growth phase will last for four years. Free cash flow would
rise by 10% annually. To determine free cash flow, the proper formula was used.

The corporation made a profit of Rs 1,60,341.00 crores last year after paying out costs of Rs
486.00 crores in interest.

When running the model, a 30% tax rate was used as an assumption.

A 5% annual growth rate is assumed during the four-year transit period, but no adjustments
are made to capital expenditures, depreciation, or working capital.

Following are some methods for estimating the worth of the business: Value = Free Cash
Flow + Share Price + Interest Deferral Taxes

Discounted cash flow, or DCF, is a topic that will be covered in the subsequent video. DCF
relies heavily on an idea called economic value added (EVA).

It is based on the IRR of a corporation. An investment's return is the total amount invested
less the initial investment and any transaction costs. You also noted that NOPLAT is
calculated differently in the EPM model than in the two-stage and three-stage DCF models.

Formula for Calculating ROIC: NPV + NOPLAT You may figure out your ROI by using the
Capital Spent formula.

End-term Examination –Fall’2022, JGBS Page 2

In addition, I learned about capital charge, or the cost a company must bear in order to make
a profit on the money it first invested. You may write it out like this:

To calculate capital expenditures, subtract the cost of maintenance from the total amount
invested.

Money made in the economy equals Not OPLA + money invested.

Enterprise Value = Net Present Value + Initial Invested Capital was provided as a formula for
determining the total worth of a business.

Loss Potential (PV) Plus Overall Loss Potential (PV) (EP)

Value at Expiration (VE) = Value in the Present (TV)

Value at Present Time Equals NPV.

The accounting for value approach originates in the equity book value. This figure is
equivalent to book equity plus any returns in excess of projections.

We also figured out how to calculate the net profit after subtracting the cost of capital.

You found that the accounting for value framework allows for the value of a share to be
calculated using either the residual earnings technique or the dividend method. You picked up
this knowledge along the way.

The residual earnings method takes into account all of the following factors when
establishing a stock price:

RE = BN + PV describes ER. Benefits that are expected to be realised in the future have a
value greater than zero right now. By the end of the day, earnings had risen to at least two.

Calculating the worth of a stock based on dividends requires the usage of the following
formula:

The formula for determining dividend value is as follows: Present Dividend Value (PV) times
Share Value (SV) raised to the power of two plus Book Value (PV) raised to the power of
two plus (PV). Salary workers' net salary at the conclusion of the pay period

PV = Total Assets in the Present (TA)

Based on what has been said, it is clear that DV is equivalent to dividend value.

Whether or not the strategy is used, the total value of the stock remains the same.

The output of the model has been pasted below :

End-term Examination –Fall’2022, JGBS Page 3

 Output from the program
Initial High Growth
Phase
Cost of Equity = 13.05%
Current Earnings = 11,342.00

Proportion of Debt: 15.00%

Capital Spending (DR)=
Proportion of Debt: 15.00%
Working Capital (DR)=

Current Earnings per 11,342.00

share=
(Capital Spending - -301.75
Depreciation)*(1-DR)
Change in Working 1,015.75
Capital * (1-DR)
Current FCFE 10,628.00

Growth Rate in Earnings

per share - Initial High
Growth phase
Growth Weight
Rate
Historical Growth = 0.00% 0.00%
Outside Estimates = 10.00% 100.00%
Fundamental Growth = 0.00% 0.00%
Weighted Average 10.00%

Growth Rate in capital

spending, depreciation
and working capital
High Transition Stable Growth
Growth period
Growth rate in capital 10.00% Earnings g 5.00%
spending =
Growth rate in 10.00% Earnings g 5.00%
depreciation =
Growth rate in revenues 10.00% Earnings g 5.00%
=

Working Capital as 21.75% (in percent)

percent of revenues =

The dividends for the

high growth phase are
shown below (upto 10
years)
Year 1 2 3 4
Earnings 12,476.20 13,723.82 15,096.20 16,605.82

End-term Examination –Fall’2022, JGBS Page 4

(CapEx- -331.93 -365.12 -401.63 -441.79
Depreciation)*(1-DR)
Chg. Working Capital 2,964.12 3,260.53 3,586.59 3,945.24
*(1-DR)
FCFE 9,844.01 10,828.41 11,911.25 13,102.37
Present Value 8,707.66 8,472.73 8,244.14 8,021.72

Transition period (upto

ten years)
Year 5 6 7 8
Growth Rate 8.75% 7.50% 6.25% 5.00%
Cumulated Growth 8.75% 16.91% 24.21% 30.42%
Earnings 18,058.83 19,413.24 20,626.57 21,657.90
(CapEx- -480.45 -516.48 -548.76 -576.20
Depreciation)*(1-DR)
Chg. Working Capital 3,797.30 3,539.62 3,170.91 2,695.28
*(1-DR)
FCFE 14,741.98 16,390.10 18,004.42 19,538.83
Beta 1.1 1.1 1.1 1.1
Cost of Equity 13.05% 13.05% 13.05% 13.05%
Present Value 7,983.68 7,851.60 7,629.31 7,323.76
End-of-Life Index 0 0 0 1
Stable Growth Phase
Growth Rate in Stable 5.00%
Phase =
FCFE in terminal year = 25,913.15
Cost of Equity in Stable 13.05%
Phase =
Price at the end of 3,21,902.45
growth phase =

Present Value of FCFE 33,446.25

in high growth phase =
Present Value of FCFE 30,788.35
in transition phase =
Present Value of 1,20,659.01
Terminal Price =
Value of the firm = 1,84,893.60

End-term Examination –Fall’2022, JGBS Page 5

Answer 2:

Analysis of Liquidity Positions of the companies

The liquidity position of the companies is calculated with the help of financial ratios,
such as

 Net working capital

 Current ratio, and
 Quick ratio,

Step one in any liquidity study should be determining the company's net working
capital. What separates a company's current assets from its current obligations is its
net working capital. The formula for calculating net working capital is as follows:

Current Assets less Current Liabilities.

The second part of a company's liquidity study is to determine its current ratio. The
current ratio indicates the extent to which a company's assets cover its short-term debt
commitments. To be "current," a time frame typically has to be less than a year.
Here's the formula:

The current ratio is the current assets divided by the current liabilities.

The quick ratio is the last component of a company's liquidity examination. When
evaluating liquidity, the quick ratio is stricter than the current ratio. Determines
whether or not the firm can pay its short-term debt commitments without liquidating
any of its current assets. Because you have to go out and locate a buyer for your
inventory, it is the least liquid of all your present assets. In a sluggish economy, it
might be difficult to find a buyer. Therefore, businesses want to avoid liquidating
stock to pay off their short-term debt. You may write it out like this:

The Quick Ratio is defined as the ratio of current assets to current liabilities, less the
value of inventories.

Note:

 Companies for analysis: MRF LTD, VISHNU CHEMICALS, FOCUS LIGHTING

& FIXTURE LTD, MALU PAPER MILLS & MARUTI SUZUKI INDIA
 Each sum is denoted in crores.
 Used Formula are as under: (Net Working Capital = Current Assets - Current
Liabilities), (Current Ratio = Current Assets/Current Liabilities) and (Quick
Ratio = Current Assets-Inventory/Current Liabilities).

End-term Examination –Fall’2022, JGBS Page 6

 Analysis of companies one by one:

 MRF LTD
The Madras Rubber Factory (often abbreviated as MRF or MRF Tyres) is the
biggest tyre maker in India and operates as an Indian multinational
corporation. Its main office is located in the Indian city of Chennai in the state
of Tamil Nadu. Tires, treads, tubes, conveyor belts, paints, and toys are just a
few of the many rubber items that this firm produces. The MRF Pace
Foundation and the MRF Institute for Driver Development (MIDD) are two of
MRF's charitable initiatives in Chennai. The company’s net working capital,
quick ratio and current ratio are in a very good position; all are above the
margin of standards.

 VISHNU CHEMICALS:
Sodium dichromate, potassium dichromate, basic chromium sulphate, and
yellow sodium sulphate are only a few of the chrome compounds that Vishnu
Chemicals Ltd produces. The firm offers a wide variety of chemicals and
nutritional supplements, such as sodium dichromate dihydrate, basic
chromium sulphate, chromic acid, sodium sulphate, potassium dichromate,
sodium saccharin, menadione, and menadione nicotinamide bisulfited (44%).
Since the company's liabilities exceeded its assets, its working capital was a
negative 33.97 crores. In subsequent years, the company was able to raise its
working capital, and by the 2021-22 fiscal year, it had 42.70 crores. In
addition to being above the threshold of 1, all of the current ratios for all five
years are also above the threshold of 1, but the quick ratios are all below the
threshold of 1 throughout. It is assumed in these notes that the business is an
"inventory-based" one, meaning that it places a higher priority on stock than
on other forms of liquid assets.

 FOCUS LIGHTING & FIXTURE LTD

Focus Lighting and Fixtures Limited manufacture and sells LED lights.
Trading and Manufacturing are Company segments. The Company delivers
retail, office, residential, hospitality, and infrastructure lighting. It offers ALP,
ARRAY, ARRAY PRO, BOOM, DIONE COVE, ELITE, EOS, JOY,
MAGNUS, NEO, NIX, NOVA, PERDU, RAY M, S SPOT, VARIO, and
XTRA-M. Its ALPs are M, L, M, and L. ARRAY PRO 4X SL C T, SL B T,
and P its products. Cabinet lights include TRIO POST, SOLO, ARC SHELF,
and ARC. XTRA M, FLEX M, FX, and MT are its XTRA-M products. The
company uses lighting systems, cabinet lights, pendants, recessed, semi-
recessed, surface, and track. Because the company's working capital, current
ratios, and quick ratios were all positive and above the margin in all the fiscal
years, the company experienced a living with wings during these periods. If
you take a look at the line graphs of the corporation, you'll see that it has the
form of a heartbeat graph. The company is stepping up its status higher

 MALU PAPER MILLS:

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 Malu Paper Mills Limited in India is responsible for the production of paper.
The primary activities of the firm are the manufacture of Kraft paper as well as
newsprint. Within the city of Nagpur, which is located in Central India, the
firm has developed three paper mills. As of the 31st of March in 2011, the
capacity for the yearly manufacture of paper by the Company was 19,800
tonnes. For the year that ended on March 31, 2011, Unit I produced
12,085.982 metric tonnes of paper, Unit II produced 19,790.405 metric tonnes
of Kraft paper, Unit III produced 25,245.524 metric tonnes of newspaper and
8,443.757 metric tonnes of writing and printing, and Unit IV produced
8,443.757 metric tonnes of writing and printing. Malu Group's parent firm is
referred to here as Firm. On the basis of what has been seen, the company is in
a precarious situation: the sum of its obligations is more than the value of its
assets, and it has a negative net working capital position. The ratio of
quickening to current is one that is lower than 1. To pay off the company's
debts via the sale of its assets would incur a price that is unfeasibly high. The
company is putting a lot of effort into adjusting by broadening its asset base,
but at the same time, its liabilities are rising. It is obvious that the majority of
their debt is being used to keep the shelves stocked throughout the last five
years, and it is also possible that the earnings are not being used toward
repaying their obligations. Either way, it is evident that the majority of their
debt is being used.

 MARUTI SUZUKI INDIA:

The primary focuses of Maruti Suzuki India Limited's (MSIL) business
activities are the production of vehicles, the acquisition of automobiles, and
the retail sale of automotive parts and accessories (automobiles). The
Company's other primary areas of activity are the selling of pre-owned
automobiles, the management of fleets, and automobile financing. The
business provides customers with a wide range of services, including
financing, insurance, authentic accessories and parts, a driving school, and an
auto card. The business's current ratio and quick ratio are both lower than 1,
and the company has a negative working capital. For the fiscal years 2018
through 2020, the company has a negative working capital balance of more
than one thousand crore rupees. During the fiscal year 2021, the net working
capital (NWC) of the corporation was in the green by 2420 crores, but by the
following year, it had fallen back into the red. Despite the fact that the
company's net assets are growing (assets minus inventory), the stock continues
to "go up some days and down other days."

End-term Examination –Fall’2022, JGBS Page 8