ASSUMPTION: Market Return 12%

Particulars Nirman Ltd. Ganpati

Revenues 1200 600
COGS 57% 75%
Depreciation 42 25
Tax Rate 30% 30%
Capital Spending 75 40
Working Capital (% of Revenue) 40% 30%
Beta 1.2 1.2
Growth Rate 25% 25%
High Growth Period 5 5
Perpetual Growth Rate 6% 6%
Stable Beta 1.1 1.1
Working Capital

a) Nirman Ltd.
Year 0 1 2 3
Revenue ₹ 1,200.00 ₹ 1,500.00 ₹ 1,875.00 ₹ 2,343.75
COGS ₹ 684.00 ₹ 855.00 ₹ 1,068.75 ₹ 1,335.94
Gross Profit ₹ 516.00 ₹ 645.00 ₹ 806.25 ₹ 1,007.81
Operating Expenses (Depreciation) ₹ 42.00 ₹ 52.50 ₹ 65.63 ₹ 82.03
EBIT ₹ 474.00 ₹ 592.50 ₹ 740.63 ₹ 925.78
EBIT(1 - Tax) ₹ 331.80 ₹ 414.75 ₹ 518.44 ₹ 648.05
Add: Depreciation ₹ 42.00 ₹ 52.50 ₹ 65.63 ₹ 82.03
Less: Capital Expenditures ₹ 75.00 ₹ 93.75 ₹ 117.19 ₹ 146.48
Less: Change in Working Capital NA ₹ 120.00 ₹ 150.00 ₹ 187.50
Free Cash Flows to the Firm ₹ 253.50 ₹ 316.88 ₹ 396.09
W/N
Working Capital ₹ 480.00 ₹ 600.00 ₹ 750.00 ₹ 937.50

Weighted Average Cost of Capital 13.00%

PVIF Values 0.88 0.78 0.69

Discounted FCFF ₹ 224.34 ₹ 248.16 ₹ 274.51

Sum of Free Cash Flows ₹ 1,386.59

Perpetual Value ₹ 7,482.78

Firm Value ₹ 8,869.36

b) Ganpati Co.
Year ₹ - 1 2 3
Revenue ₹ 600.00 ₹ 750.00 ₹ 937.50 ₹ 1,171.88
COGS ₹ 450.00 ₹ 562.50 ₹ 703.13 ₹ 878.91
 Gross Profit ₹ 150.00 ₹ 187.50 ₹ 234.38 ₹ 292.97
Operating Expenses (Depreciation) ₹ 25.00 ₹ 31.25 ₹ 39.06 ₹ 48.83
EBIT ₹ 125.00 ₹ 156.25 ₹ 195.31 ₹ 244.14
EBIT(1 - Tax) ₹ 87.50 ₹ 109.38 ₹ 136.72 ₹ 170.90
Add: Depreciation ₹ 25.00 ₹ 31.25 ₹ 39.06 ₹ 48.83
Less: Capital Expenditures ₹ 40.00 ₹ 50.00 ₹ 62.50 ₹ 78.13
Less: Change in Working Capital NA ₹ 45.00 ₹ 56.25 ₹ 70.31
Free Cash Flows to the Firm ₹ 45.63 ₹ 57.03 ₹ 71.29
W/N
Working Capital ₹ 180.00 ₹ 225.00 ₹ 281.25 ₹ 351.56

Weighted Average Cost of Capital 13.00%

PVIF Values 0.88 0.78 0.69

Discounted FCFF ₹ 40.38 ₹ 44.66 ₹ 49.41

Sum of Free Cash Flows ₹ 249.56

Perpetual Value ₹ 1,845.08

Firm Value ₹ 2,094.64

c) Value of Combined Firm =

(since WACC is the same and no debt)
A+B
₹ 10,964.00

d)
Ganpati Co.
Year 0 1 2 3
Revenue 1800
COGS ₹ 1,134.00
Gross Profit ₹ 666.00
Operating Expenses (Depreciation) ₹ 66.00
EBIT ₹ 600.00 ₹ 744.00 ₹ 922.56 ₹ 1,143.97
EBIT(1 - Tax) ₹ 420.00 ₹ 520.80 ₹ 645.79 ₹ 800.78
Add: Depreciation ₹ 66.00 ₹ 81.84 ₹ 101.48 ₹ 125.84
Less: Capital Expenditures ₹ 115.00 ₹ 142.60 ₹ 176.82 ₹ 219.26
Less: Change in Working Capital ₹ 158.40 ₹ 196.42 ₹ 243.56
Free Cash Flows to the Firm ₹ 301.64 ₹ 374.03 ₹ 463.80
W/N
Working Capital ₹ 660.00 ₹ 818.40 ₹ 1,014.82 ₹ 1,258.37

Weighted Average Cost of Capital 13%

PVIF Values 0.88 0.78 0.69

Discounted FCFF ₹ 266.94 ₹ 292.92 ₹ 321.44

Sum of Free Cash Flows ₹ 1,621.09
Perpetual Value ₹ 15,902.59

Firm Value ₹ 17,523.69

Value of Synergy ₹ 6,559.68

Maximum Purchase Price ₹ 8,654.32

 4 5 6
₹ 2,929.69 ₹ 3,662.11
₹ 1,669.92 ₹ 2,087.40
₹ 1,259.77 ₹ 1,574.71
₹ 102.54 ₹ 128.17 ₹ 135.86
₹ 1,157.23 ₹ 1,446.53 ₹ 1,533.33
₹ 810.06 ₹ 1,012.57 ₹ 1,073.33
₹ 102.54 ₹ 128.17 ₹ 135.86
₹ 183.11 ₹ 228.88 ₹ 156.24
₹ 234.38 ₹ 292.97 ₹ 87.89
₹ 495.12 ₹ 618.90 ₹ 965.06

₹ 1,171.88 ₹ 1,464.84 ₹ 1,552.73

0.61 0.54

₹ 303.66 ₹ 335.91

4 5 6
₹ 1,464.84 ₹ 1,831.05
₹ 1,098.63 ₹ 1,373.29
₹ 366.21 ₹ 457.76
₹ 61.04 ₹ 76.29
₹ 305.18 ₹ 381.47 ₹ 404.36
₹ 213.62 ₹ 267.03 ₹ 283.05
₹ 61.04 ₹ 76.29 ₹ 80.87
₹ 97.66 ₹ 122.07 ₹ 93.00
₹ 87.89 ₹ 109.86 ₹ 32.96
₹ 89.11 ₹ 111.39 ₹ 237.96

₹ 439.45 ₹ 549.32 ₹ 582.28

0.61 0.54

₹ 54.65 ₹ 60.46

4 5 6

₹ 1,418.53 ₹ 1,758.98 ₹ 1,864.51

₹ 992.97 ₹ 1,231.28 ₹ 1,305.16
₹ 156.04 ₹ 193.49 ₹ 205.10
₹ 271.88 ₹ 337.14 ₹ 235.86
₹ 302.01 ₹ 374.49 ₹ 116.09
₹ 575.11 ₹ 713.14 ₹ 1,158.30

₹ 1,560.38 ₹ 1,934.87 ₹ 2,050.96

0.61 0.54 0.48

₹ 352.73 ₹ 387.06