Additional Problems

7. The following is the balance sheet of a corporate firm as of March 31st.

(Rs in lakhs)
Liabilities Amount Assets Amount
Share Capital (of Rs.100 each 100 Land & buildings 40
fully paid) Plant & Machinery 80
Reserves & Surplus. 40 Marketable Securities 10
Sundry Creditors and other Stock 20
liabilities 30 Debtors 15
Cash & bank balance 5
170 170
Additional Information:
Profit before tax for the current year-end amounts to Rs.64 lakh, including Rs.4 lakh as extraordinary
income. Besides, the firm has earned interest income of Rs.1 lakh in the current year from investments
in marketable securities. However, an additional amount of Rs.5 lakhs per annum, in terms of
advertisement and other expenses, will be required to be spent for the smooth running of the business
in the years to come.
Market values of land and buildings, and plant and machinery are estimated at Rs.90 lakh and Rs.100
lakh respectively. In order to match the revalued figures of these fixed assets, an additional
depreciation of Rs.6 lakh is required to be taken into consideration. Effective corporate tax rate may
be taken at 30 percent. The capitalisation rate applicable to businesses of such risk is 15 percent.
a) From the above information, compute the value of business based on the capitalisation method.
b) Determine the expected market price of the share, given P/E is 8 times and 5 times. Interpret the
results.
c)Determine value of business as per net asset method. Assets are to be valued at market value. Value
of goodwill is also to be considered to value assets. Its value is to be reckoned as an equivalent to the
present value of super profits, which are likely to accrue for 4 years. For the purpose of determining
super profits, normal profits are to be computed with reference to the year-end value of net assets/
capital employed (excluding goodwill). Also compute the market value per equity share as per this
approach.
d) The projected free cashflows of the firm are 64 lacs, 65 lacs, 78 lacs, 89 lacs and 91 lacs.
Determine the value of the firm using DCF approach.
e) Determine the fair value of the firm.

8. Determine the continuing value of the firm from the following information:

Particulars Rs (in
million)
Free Cashflow from business operations at the end of explicit forecast period (Year 6) 44
Expected annual growth rate in free cashflows to the firm, after forecast period 8%
WACC 12%
Cost of Equity Capital 15%
9. The chemicals and fertilizers Ltd is a growing company. Its free cash flows for equity holders have
been growing at a rate of 25% in recent years. This abnormal growth rate is expected to continue for
another 5 years, then they are likely to grow at a normal rate of 8%. The required rate of return on the
shares, by the investing community is 15%; the firm’s WACC is 12%. The amount of free cashflow
per equity share at the beginning of the current year is Rs.30. Determine the maximum price an
investor should be willing to pay now based on free cashflow approach. The issue price of share is
Rs.500.

10. Hypothetical Limited is growing at an above-average rate. It foresees a growth rate of 20% pa in
free cashflows to equity holders in the next 4 years. It is likely to fall to 12% in the next two years.
After that, the growth rate is expected to stabilize at 5% pa. The amount of free cash flow per equity
share at the beginning of the current year is Rs.10. Find out the maximum price at which an investor,
follower of the free cash approach, will be prepared to buy the company’s shares as on date assuming
an equity capitalisation rate of 14 percent.

11. The most recent accounts of a corporate firm engaged in manufacturing business are summarised
below (Rs in million)
Income statement for the current year ended March 31 Amount
Sales revenue 93.5
EBIT 18.0
Less: Interest on loan 1.8
EBT 16.2
Less: Corporate Taxes @ 35% 5.67
EAT 10.53
Balance Sheet as on 31 March, Current year
Liabilities Amount Assets Amount
Equity share capital (1 lakh 10.0 Freehold land & building 20.0
share of Rs.100 each) (net)
Reserves & surplus 32.5 Plant & machinery (net) 29.5
10%loan 18.0 Current Assets:
Creditors & other liabilities 18.0 Stock `10.5
Debtors 15.0
Cash & bank balance 4.0
78.5 78.5
Additional Information
i) The finance manager of the firm has estimated the future free cash flows of the company as follows:
(Rs in million)
Year 1 22
2 23
3 24.5
4 26
5 30
6 32
Free cash flows in subsequent years, after year 6, are estimated to grow at 4 percent. The company’s
weighted average cost of capital is 12 percent.
ii) The current resale value of the following assets has been assessed by the professional valuer as
follows:
Freehold land & building Rs. 60 million
Plant and Machinery Rs. 20 million
Stock Rs.11 million
The current resale values of the remaining assets are as per their book values.
iii) A similar sized company (which is listed on BSE) and is engaged in same business has a P/E ratio
of 7 times.
You are required to compute the value of the firm and value of equity share based on
a) Net asset method (book value & market value)
b) P/E Ratio method
c) Free cashflow method

12. Exotica Corporation is expected to grow at a higher rate for five years. Thereafter the growth rate
will fall and stabilize at a lower level. The following information is available.
Base Year (Year 0) Information

Revenues 4000 million

EBIT (12.5% OF Revenues) 500 million
Capital Expenditure 300 million
Depreciation 200 million
Net Working Capital as Percentage of Revenue 30%
Corporate Tax rate (for all time) 40%
Paid up equity capital (10 par) 300 million
Market Value of Debt 1250 million

Inputs for high growth rate

Length of high growth phase 5 years

Growth rate in revenues, depreciation, EBIT and Capital 10%
Expenditure
Net Working Capital as a percentage of revenues 30%
Cost of debt 15% (pre tax)
Debt-equity ratio 1:1
Risk free rate 13%
Market Risk Premium 6%
Equity Beta 1.33

Inputs for stable growth rate

Expected growth rate in revenue and EBIT 6%

Net Working Capital as a percentage of revenues 30%
Cost of Debt 15% (pre tax)
Debt Equity Ratio 2:3
Risk free rate 12%
Market Risk Premium 7%
Equity Beta 1.0
Given the above information calculate the WACC for high growth phase and stable growth phase.
Also determine the value of the firm
13. Multifold Ltd is being appraised by an investment The following information is available.
Base Year (Year 0) Information

Revenues 1000 million

EBIT (12.5% OF Revenues) 250 million
Capital Expenditure 295 million
Depreciation and amortisation 240 million
Net Working Capital as percentage of Revenue 20%
Corporate Tax rate (for all time) 40%
Inputs for high growth period

Length of high growth phase 5 years

Growth rate in revenues, depreciation, EBIT and Capital 25%
Expenditure
Net Working Capital as a percentage of revenues 20%
Cost of debt 15% (pre tax)
Debt-equity ratio 1.5
Risk free rate 12%
Market Risk Premium 6%
Equity Beta 1.583
Inputs for Transition Period

Length of transition period 5 years

Growth rate in EBIT will decline from 25% in year 5 to 10 % in year 10 in linear movement of 3
percent each year
Net Working capital as a percentage of revenues 20%
The debt equity ratio during this period will drop to 1:1 and the
pre-tax cost of debt will be 14%
Risk free rate 11%
Market risk premium 6%
Equity beta 1.10
Inputs for stable growth rate

Expected growth rate in revenue, EBIT, Capital Expenditure and depreciation 10%
Net Working Capital as a percentage of revenues 20%
Debt Equity Ratio 0:1
Pre-tax cost of debt 12%
Risk free rate 10%
Market Risk Premium 6%
Equity Beta 1.0
Given the above information determine the value of the firm.
THREE STAGE MODEL
For the first four years, XYZ firm is assumed to grow at a rate of 10%. After four years, the
growth rate of cash flow is assumed to decline linearly to 6%. After 7 years, the firm is assumed
to grow at a rate of 6% indefinitely. The current year's free cash flow is Rs 2 (lakhs) and the
required rate of return is 14%. Find out the value of the firm
.