CORPORATE VALUATION

CHAPTER – 07
CORPORATE VALUATION
Corporate Valuation
(1) Economic Value Added (EVA).

(2) Valuation of Firm.

(3) Gearing of Beta.

(1) Economic Value Added (EVA)

 Economic Value Added means, surplus [Remaining Amount] available
after providing cost of capital to capital providers. Capital providers mean
equity share holders, preference share holders & debt holders.

 Following Steps are applied to calculated EVA.

Step 1: Calculate Net Operating PAT (NOPAT)

EBIT xxx

(-) Tax xxx

NOPAT xxx

Step 2: Calculate Weighted Average Cost of Capital

WACC = (ke × wE) + (kd × wd) + (kp × wp)

Step 3: Calculate Economic Value Added

EVA = NOPAT – C/E × WACC

C/E = Capital Employed

Example – 01

ESC (50,000 share @ 10) = ₹ 5,00,000

12 % PSC = ₹ 3,00,000

10% debentures = ₹ 2,00,000

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EBIT = ₹ 2,40,000

Tax = 30%

Rf = 6%

Rm = 11%

Beta = 1.25

Calculate Economic Value Added.

Solution:

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QUESTION – 02

The following data pertains to XYZ Inc. engaged in software consultancy

business as on 31 December 2010.

($ Million)

Income from consultancy 935.00

EBIT 180.00
Less: Interest on Loan 18.00
EBT 162.00
Tax @ 35% 56.70
105.30

Balance Sheet
($ Million)

Liabilities Amount Assets Amount

Equity Stock (10 million 100 Land and Building 200
share @ $ 10 each) Computers &Software’s 295
Reserves & Surplus 325
Loans 180 Current Assets:
Current Liabilities 180 Debtors 150
Bank 100
Cash 40 290
785 785

With the above information and following assumption you are required to
compute

(a) Economic Value Added

(b) Market Value Added.

Assuming that:

(i) WACC is 12%.

(ii) The share of company currently quoted at $ 50 each

(Study Material & PM)

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SOLUTION:-

QUESTION – 03

Herbal Gyan is a small but profitable producer of beauty cosmetics using the
plant Aloe Vera. This is not a high-tech business, but Herbal’s earnings have
averaged around ₹ 12 lakh after tax, largely on the strength of its patented
beauty cream for removing the pimples.

The patent has eight years to run, and Herbal has been offered ₹ 40 lakhs for
the patent rights. Herbal’s assets include ₹ 20 lakhs of working capital and ₹
80 lakhs of property, plant, and equipment. The patent is not shown on
Herbal’s books. Suppose Herbal’s cost of capital is 15 percent. What is its
Economic Value Added (EVA)?

(Study Material & PM)

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SOLUTION:-

QUESTION – 04

Constant Engineering Ltd. has developed a high tech product which has
reduced the Carbon emission from the burning of the fossil fuel. The product is
in high demand. The product has been patented and has a market value of ₹
100 Crore, which is not recorded in the books. The Net Worth (NW) of Constant
Engineering Ltd. is ₹ 200 Crore. Long term debt is ₹ 400 Crore. The product
generates a revenue of ₹ 84 Crore. The rate on 365 days Government bond is
10 percent per annum. Market portfolio generates a return of 12 percent per
annum. The stock of the company moves in tandem with the market. Calculate
Economic Value added of the company.

(SM, PM & Exam May – 2018)

SOLUTION:-

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QUESTION – 05

The following information is given for 3 companies that are identical except for
their capital structure:

Orange Grape Apple

Total invested capital 1,00,000 1,00,000 1,00,000
Debt/assets ratio 0.8 0.5 0.2
Shares outstanding 6,100 8,300 10,000
Pre tax cost of debt 16% 13% 15%
Cost of equity 26% 22% 20%
Operating Income (EBIT) 25,000 25,000 25,000

The tax rate is uniform 35% in all cases.

(i) Compute the Weighted average cost of capital for each company.

(ii) Compute the Economic Valued Added (EVA) for each company.

(iii) Based on the EVA, which company would be considered for best
investment? Give reasons.

(iv) If the industry PE ratio is 11x, estimate the price for the share of each
company.

(v) Calculate the estimated market capitalization for each of the Companies.

(SM, PM & MTP April - 2022)

SOLUTION:-

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QUESTION – 06

Tender Ltd has earned a net profit of ₹ 15 lacs after tax at 30%. Interest cost
charged by financial institutions was ₹ 10 lacs. The invested capital is ₹ 95 lacs
of which 55% is debt. The company maintains a weighted average cost of
capital of 13%.

Required:

(a) Compute the operating income.

(b) Compute the Economic Value Added (EVA).

(c) Tender Ltd. has 6 lac equity shares outstanding. How much dividend can
the company pay before the value of the entity starts declining?

(Study Material & PM)

SOLUTION:-

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QUESTION – 07

With the help of the following information of Jatayu Limited compute the
Economic Value Added:

Capital Structure Equity capital ₹ 160 Lakhs

Reserves and Surplus ₹140lakhs
10% Debentures ₹ 400 lakhs

Cost of equity 14%

Financial Leverage 1.5 times

Income Tax Rate 30%

(Study Material & PM)

SOLUTION:-

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(2) Valuation of Firm

(I) There are various methods to find out value of company.

(i) Net Realizable Value Method

Assets (M.V.) xxx

(-) Liability (Payable Value) xxx

Value of Business xxx

(ii) Book Value Method

ESC xxx

(+) R & S xxx

Value xxx

(iii) Dividend Growth Model

Dividend at the end of year

Value of Business = (1 + g)
ke −g

(iv) Price Earnings Method

Value of Business = Earnings × P/E Ratio

(v) Free Cash Flow Approach

 This method is used whenever one company want to take

over another company. In this situation, purchasing
company should focus on earnings of Vender Company not
dividend.

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 This method is used whenever track record of dividend is not

available.

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Example – 03

Sales 25,00,000 p.a.

VC @ 30%

Fixed Cost = 2,00,000 p.a.

(Excluding depreciation)

Depreciation = ₹ 1,25,000 p.a.

Interest = 1,12,000

Tax = 30%

Calculate FCFF.

SOLUTION:-

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Example – 04

EBIT = ₹ 3,00,000

Tax = 40%

Capital Expenditure = 75,000

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Depreciation = 75,000

Change in working capital = 0

Calculate FCFF.

SOLUTION:-

Example – 05

Base Year

Sales = ₹ 5,00,000

Operating Expenditure = ₹ 1,25,000 (Including Depreciation)

Tax = 30%

Capital Expenditure = 1,45,000

Depreciation = 30,000

Sales & operating expenditure will grow by 20% in next 3 years & there after
10% p.a. perpetual.

Capital Expenditure net of depreciation will grow by 15% in next 3 years &
from 4th year capital expenditure is equal to depreciation.

Working Capital should be 10% of sales

Ko = 15%

Calculated (1) Value of Firm

(2) Value of Equity

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SOLUTION:-

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QUESTION – 15

Following information are available in respect of XYZ Ltd. which is expected to

grow at a higher rate for 4 years after which growth rate will stabilize at a lower
level:
Base year information:
Revenue - ₹ 2,000 crores
EBIT - ₹ 300 crores
Capital expenditure - ₹ 280 crores
Depreciation - ₹ 200 crores

Information for high growth and stable growth period are as follows:

High Stable Growth

Growth
Growth in Revenue & EBIT 20% 10%
Growth in capital expenditure and 20% Capital expenditure are
depreciation offset by depreciation
Risk free rate 10% 9%
Equity beta 1.15 1
Market risk premium 6% 5%
Pre tax cost of debt 13% 12.86%
Debt equity ratio 1:1 2:3

For all time, working capital is 25% of revenue and corporate tax rate is 30%.
What is the value of the firm?

(SM & MTP March – 2022)

SOLUTION:-

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QUESTION – 12

The valuation of Hansel Limited has been done by an investment analyst.

Based on an expected free cash flow of ₹ 54 lakhs for the following year and an
expected growth rate of 9 percent, the analyst has estimated the value of
Hansel Limited to be ₹ 1800 lakhs. However, he committed a mistake of using
the book values of debt and equity.

The book value weights employed by the analyst are not known, but you know
that Hansel Limited has a cost of equity of 20 percent and post tax cost of debt
of 10 percent. The value of equity is thrice its book value, whereas the market
value of its debt is nine-tenths of its book value. What is the correct value of
Hansel Ltd ?

(Study Material & PM)

SOLUTION:

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QUESTION – 17

Eagle Ltd. reported a profit of ₹ 77 lakhs after 30% tax for the financial year
2011-12. An analysis of the accounts revealed that the income included
extraordinary items of ₹ 8 lakhs and an extraordinary loss of ₹10 lakhs. The

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existing operations, except for the extraordinary items, are expected to

continue in the future. In addition, the results of the launch of a new product
are expected to be as follows:

₹ In Laksh
Sales 70
Material Cost 20
Labour Cost 12
Fixed Cost 10

You are required to:

(i) Calculate the value of the business, given that the capitalization rate is
14%.

(ii) Determine the market price per equity share, with Eagle Ltd.‘s share
capital being comprised of 1,00,000 13% preference shares of ₹ 100 each
and 50,00,000 equity shares of ₹ 10 each and the P/E ratio being 10
times.

(Study Material & PM)

SOLUTION:

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QUESTION – 24

T Ltd. Recently made a profit of ₹ 50 crore and paid out ₹ 40 crore (slightly
higher than the average paid in the industry to which it pertains). The average
PE ratio of this industry is 9. As per Balance Sheet of T Ltd., the shareholder’s
fund is ₹ 225 crore and number of shares is 10 crore. In case company is
liquidated, building would fetch ₹ 100 crore more than book value and stock
would realize ₹ 25 crore less.

The other data for the industry is as follows:

Projected Dividend Growth 4%

Risk Free Rate of Return 6%

Market Rate of Return 11%

Average Dividend Yield 6%

The estimated beta of T Ltd. is 1.2. You are required to calculate value of T Ltd.
using

(i) P/E Ratio

(ii) Dividend Yield

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(iii) Valuation as per:

(a) Dividend Growth Model

(b) Book Value

(c) Net Realizable Value

SOLUTION:-

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QUESTION – 22

ABC Co. is considering a new sales strategy that will be valid for the next 4
years. They want to know the value of the new strategy. Following information
relating to the year which has just ended, is available:

Income Statement ₹
Sales 20,000
Gross margin (20%) 4,000
Administration, Selling & distribution expense (10%) 2,000
PBT 2,000
Tax (30%) 600
PAT 1,400
Balance Sheet Information
Fixed Assets 8,000
Current Assets 4,000
Equity 12,000

If it adopts the new strategy, sales will grow at the rate of 20% per year for
three years. From 4th year onward Cash Flow will be stabilized. The gross
margin ratio, Assets turnover ratio, the Capital structure and the income tax
rate will remain unchanged.

Depreciation would be at 10% of net fixed assets at the beginning of the year.

The Company’s target rate of return is 15%.

Determine the incremental value due to adoption of the strategy.

(Study Material, PM & RTP May - 2020)

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SOLUTION:

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QUESTION – 25

XY Ltd., a Cement manufacturing Company has hired you as a financial

consultant of the company. The Cement Industry has been very stable for some
time and the cement companies SK Ltd. & AS Ltd. are similar in size and have
similar product market mix characteristic. Use comparable method to value the
equity of XY Ltd. In performing analysis, use the following ratios:

(i) Market to book value

(ii) Market to replacement cost

(iii) Market to sales

(iv) Market to Net Income

The following data are available for your analysis:

(Amount in ₹)

SK Ltd AS Ltd. XY Ltd.

Market Value 450 400
Book Value 400 300 250
Replacement Cost 600 550 500
Sales 550 450 500
Net Income 18 16 14

(Exam November – 2019)

SOLUTION:-

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QUESTION – 26

You are interested in buying some equity stocks of RK Ltd. The company has 3
divisions operating in different industries. Division A captures 10% of its
industries sales which is forecasted to be ₹ 50 crore for the industry. Division B
and C captures 30% and 2% of their respective industry's sales, which are
expected to be ₹ 20 crore and ₹ 8.5 crore respectively. Division A traditionally
had a 5% net income margin, whereas divisions B and C had 8% and 10% net
income margin respectively. RK Ltd. has 3,00,000 shares of equity stock
outstanding, which sell at ₹ 250.

The company has not paid dividend since it started its business 10 years ago.
However from the market sources you come to know that RK Ltd. will start
paying dividend in 3 years time and the pay-out ratio is 30%. Expecting this
dividend, you would like to hold the stock for 5 year. By analyzing the past
financial statements, you have determined that RK Ltd.'s required rate of
return is 18% and that P/E ratio of 10 for the next year and on ending P/E
ratio of 20 at the end of the fifth year are appropriate.

Required:

(i) Would you purchase RK Ltd. equity at this time based on your one year
forecast?

(ii) If you expect earnings to grow @ 15% continuously, how much are you
willing to pay for the stock of RK Ltd ?

Ignore taxation.

PV factors are given below :

Years 1 2 3 4 5
PVIF@ 18% 0.847 0.718 0.609 0.516 0.437

(Exam November – 2019 & MTP March – 2021)

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SOLUTION:-

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QUESTION – 33

BRS Inc deals in computer and IT hardware’s and peripherals. The expected
revenue for the next 8 years is as follows:

Years Sales Revenue ($ Million)

1 8
2 10
3 15
4 22
5 30
6 26
7 23
8 20

Summarized financial position as on 31st march 2012 was as follows:

Liabilities Amount Assets Amount

Equity Stocks 12 Fixed Assets (Net) 17
12% Bonds 8 Current Assets 3
20 20

Additional Information:

(a) Its variable expenses is 40% of sales revenue and fixed operating
expenses (cash) are estimated to be as follows:

Period Amount ($ Million)

1-4 years 1.6
5-8 years 2

(b) An additional advertisement and sales promotion campaign shall be

launched requiring expenditure as per following details:

Period Amount ($ Million)

1 years 0.50
2-3 years 1.50
4-6 years 3.00
7-8 years 1.00

(c) Fixed assets are subject to depreciation at 15% as per WDV method.

(d) The company has planned additional capital expenditures (in the
beginning of each year) for the coming 8 years as follows:

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Period Amount ($ Million)

1 0.50
2 0.80
3 2.00
4 2.50
5 3.50
6 2.50
7 1.50
8 1.00

(e) Investment in Working Capital is estimated to be 20% of Revenue.

(f) Applicable tax rate for the company is 30%.

(g) Cost of Equity is estimated to be 16%.

(h) The Free Cash Flow of the firm is expected to grow at 5% per annuam
after 8 years.

With above information you are require to determine the:

(i) Value of Firm

(ii) Value of Equity

(Practice Manual)

SOLUTION:

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QUESTION – 35

The following is the Balance-sheet of Grape Fruit Company Ltd as at March

31st, 2019.

(₹ in (₹ in
Liabilities Assets
lakhs) lakhs)

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Equity shares of ₹ 100 each 600 Land and Building 200

14% preference shares of ₹ 200 Plant and Machinery 300
100/- each
13% Debentures 200 Furniture and Fixtures 50
Debenture interest accrued 26 Inventory 150
and payable
Loan from bank 74 Sundry debtors 70
Trade creditors 340 Cash at bank 130
Preliminary expenses 10
Cost of issue of debentures 5
Profit and Loss account 525
1440 1440
The Company did not perform well and has suffered sizable losses during the
last few years. However, it is felt that the company could be nursed back to
health by proper financial restructuring. Consequently the following scheme of
reconstruction has been drawn up:

(i) Equity shares are to be reduced to ₹ 25/- per share, fully paid up;

(ii) Preference shares are to be reduced (with coupon rate of 10%) to equal
number of shares of ₹ 50 each, fully paid up.

(iii) Debenture holders have agreed to forgo the accrued interest due to them.
In the future, the rate of interest on debentures is to be reduced to 9
percent.
(iv) Trade creditors will forego 25 percent of the amount due to them.
(v) The company issues 6 lakh of equity shares at ₹ 25 each and the entire
sum was to be paid on application. The entire amount was fully
subscribed by promoters.
(vi) Land and Building was to be devalued at ₹ 450 lakhs, Plant and
Machinery was to be written down by ₹ 120 lakhs and a provision of ₹15
lakhs had to be made for bad and doubtful debts.
Required:

(a) Show the impact of financial restructuring on the company’s activities.

(b) Prepare the fresh balance sheet after the reconstructions is completed on
the basis of the above proposals.

(Practice Manual)

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SOLUTION:

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QUESTION – 30

ABC Company is considering acquisition of XYZ Ltd. which has 1.5 crores
shares outstanding and issued. The market price per share is ₹ 400 at present.
ABC's average cost of capital is 12%. Available information from XYZ indicates
its expected cash accruals for the next 3 years as follows:

Year ₹ Crore
1 250
2 300
3 400
Calculate the range of valuation that ABC has to consider. (PV factors at 12%
for years 1 to 3 respectively: 0.893, 0.797 and 0.712).

(SM, PM & MTP April - 2021)

SOLUTION:

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QUESTION – 34

ABC (India) Ltd., a market leader in printing industry, is planning to diversify

into defense equipment businesses that have recently been partially opened up
by the GOI for private sector. In the meanwhile, the CEO of the company wants
to get his company valued by a leading consultants, as he is not satisfied with
the current market price of his scrip.

He approached consultant with a request to take up valuation of his company

with the following data for the year ended 2009:

Share Price ₹ 66 per share

Outstanding debt 1934 lakh

Number of outstanding shares 75 lakh

Net income (PAT) 17.2 lakh

EBIT 245 lakh

Interest expenses 218.125 lakh

Capital expenditure 234.4 lakh

Depreciation 234.4 lakh

Working capital 44 lakh

Growth rate 8% (from 2010 to 2014)

Growth rate 6% (beyond 2014)

Free cash flow 240.336 lakh (year 2014 onwards)

The capital expenditure is expected to be equally offset by depreciation in

future and the debt is expected to decline by 30% in 2014.

Required:

Estimate the value of the company and ascertain whether the ruling market
price is undervalued as felt by the CEO based on the foregoing data. Assume
that the cost of equity is 16%, and 30% of debt repayment is made in the year
2014.

(Practice Manual)

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SOLUTION:

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QUESTION – 28

AB Ltd., is planning to acquire and absorb the running business of XY Ltd. The
valuation is to be based on the recommendation of merchant bankers and the
consideration is to be discharged in the form of equity shares to be issued by
AB Ltd. As on 31.3.2006, the paid up capital of AB Ltd. consists of 80 lakhs
shares of ₹ 10 each. The highest and the lowest market quotation during the
last 6 months were ₹ 570 and ₹ 430. For the purpose of the exchange, the price
per share is to be reckoned as the average of the highest and lowest market
price during the last 6 months ended on 31.3.06.

XY Ltd.’s Balance Sheet as at 31.3.2006 is summarized below:

₹ lakhs
Sources
Share Capital
20 lakhs equity shares of ₹ 10 each fully paid 200
10 lakhs equity shares of ₹ 10 each, ₹ 5 paid 50
Loans 100
Total 350
Uses
Fixed Assets (Net) 150
Net Current Assets 200
350

An independent firm of merchant bankers engaged for the negotiation, have

produced the following estimates of cash flows from the business of XY Ltd.:

Year ended By way of ₹ lakhs

31/03/07 After tax earnings for equity 105
31/03/08 Do 120

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31/03/09 Do 125
31/03/10 Do 120
31/03/11 Do 100
Terminal Value estimate 200

It is the recommendation of the merchant banker that the business of XY Ltd.

may be valued on the basis of the average of (i) Aggregate of discounted cash
flows at 8% and (ii) Net assets value. Present value factors at 8% for years

1-5: 0.93 0.86 0.79 0.74 0.68

You are required to:

(i) Calculate the total value of the business of XY Ltd.

(ii) The number of shares to be issued by AB Ltd.; and

(iii) The basis of allocation of the shares among the shareholders of XY Ltd.

(Study Material & PM)

SOLUTION:

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QUESTION – 19

M/s. Roly Ltd. wants to acquire M/s. Poly Ltd. The following is the Balance
Sheet of Poly Ltd. as on 31st March, 2020 :

Liabilities ₹ Assets ₹
Equity Capital (₹ 10 per share) 10,00,000 Cash 20,000
Retained Earnings 3,00,000 Debtors 50,000
12% Debenture 3,00,000 Inventories 2,00,000
Creditors and other liability 3,20,000 Plant & Machinery 16,50,000
Total 19,20,000 Total 19,20,000

Shareholders of Poly Ltd. will get one share of Roly Ltd. at current Market price
of ₹ 20 for every two shares. External liabilities are expected to be settled at a
discount of ₹ 20,000. Sundry debtors and Inventories are expected to realize ₹
2,00,000.

Poly Ltd. will run as an independent unit. Cash Flow After Tax is expected to be
₹ 4,00,000 per annum for next 6 years. Assume the disposal value of the plant
after 6 years will be ₹ 1,50,000.

Poly Ltd. requires a return of 14%

n 1 2 3 4 5 6
PVIF (14%,n) 0.877 0.769 0.675 0.592 0.519 0.456

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Advise the Board of Directors on the financial feasibility of the Proposal.

(Exam January – 2021)

SOLUTION:-

QUESTION – 27

R Ltd. and S Ltd. operating in same industry are not experiencing any rapid
growth but providing a steady stream of earnings. R Ltd.'s management is
interested in acquisition of S. Ltd. due to its excess plant capacity. Share of S
Ltd. is trading in market at ₹ 3.20 each. Other data relating to S Ltd. is as
follows:

Balance Sheet of S Ltd

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Liabilities Amount (₹) Assets Amount (₹)

Current Liabilities 1,59,80,000 Current Assets 2,48,75,000
Long Term Liabilities 1,28,00,000 Other Assets 94,00,000
Reserve & Surplus 2,79,95,000 Property Plants
Share Capital & Equipment 3,45,00,000
(80 Lakhs shares of ₹ 1.5 each) 1,20,00,000

Total 6,87,75,000 Total 6,87,75,000

Particulars R Ltd. (₹) S Ltd. (₹) Combined

Entity (₹)
Profit after Tax 86,50,000 49,72,000 1,21,85,000
Residual Net Cash Flows per year 91,10,000 54,87,000 1,85,00,000
Required return on equity 13.75% 13.05% 12.5%

You are required to compute the following:

(i) Minimum price per share S Ltd. should accept from R Ltd.

(ii) Maximum price per share R Ltd. shall be willing to offer to S Ltd.

(iii) Floor Value of per share of S Ltd., whether it shall play any role in
decision for its acquisition by R Ltd.

(Exam May – 2019)

SOLUTION:-

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QUESTION – 42

Given below is the Balance Sheet of S Ltd. as on 31.3.2008:

Liabilities ₹ (in lakh) Assets ₹ (in lakh)

Share capital Land and building 40
(share of ₹ 10) 100 Plant and machinery 80
Reserves and surplus 40 Investments 10
Long Term Debts 30 Stock 20
Debtors 15
170 Cash at bank 5
170

You are required to work out the value of the Company's, shares on the basis
of Net Assets method and Profit-earning capacity (capitalization) method and
arrive at the fair price of the shares, by considering the following information:

(i) Profit for the current year ₹ 64 lakhs includes ₹4 lakhs extraordinary
income and ₹ 1 lakh income from investments of surplus funds; such
surplus funds are unlikely to recur.

(ii) In subsequent years, additional advertisement expenses of ₹ 5 lakhs are

expected to be incurred each year.

(iii) Market value of Land and Building and Plant and Machinery have been
ascertained at ₹ 96 lakhs and ₹ 100 lakhs respectively. This will entail
additional depreciation of ₹ 6 lakhs each year.

(iv) Effective Income-tax rate is 30%.

(v) The capitalization rate applicable to similar businesses is 15%.

(Practice Manual)

SOLUTION:

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QUESTION – 37

Using the chop-shop approach (or Break-up value approach), assign a value for
Cranberry Ltd. whose stock is currently trading at a total market price of €4
million. For Cranberry Ltd, the accounting data set forth three business

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segments: consumer wholesale, retail and general centers. Data for the firm’s
three segments are as follows:
Business Segment Segment Segment Segment
Sales Assets Operating Income
Wholesale €225,000 €600,000 €75,000
Retail €720,000 €500,000 €150,000
General € 2,500,000 €4,000,000 €700,000

Industry data for “pure-play” firms have been compiled and are summarized as
follows:
Business Capitalization Capitalization Capitalization/
Segment /Sales /Assets Operating Income
Wholesale 0.85 0.7 9
Retail 1.2 0.7 8
General 0.8 0.7 4

(Practice Manual)

SOLUTION:

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QUESTION – 36

Calculate the value of share from the following information:

Profit after tax of the company ₹ 290 crores

Equity capital of company ₹ 1,300 crores

Par value of share ₹ 40 each

Debt ratio of company (Debt/ Debt + Equity) 27%

Long run growth rate of the company 8%

Beta 0.1; risk free interest rate 8.7%

Market returns 10.3%

Capital expenditure per share ₹ 47

Depreciation per share ₹ 39

Change in Working capital ₹ 3.45 per shar

(RTP May – 2020)

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SOLUTION:-

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Example – 06

Equity = 3,00,000

Debt = 2,00,000

Assets beta or overall beta = 2

Stock beta or equity beta ?

SOLUTION:-

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Example – 07

FCFF1 = ₹ 4,00,000 p.a. perpetual

D/E = 2:3

Assets beta = 1.50

RF = 6%

RM = 10%

Calculate value of firm.

SOLUTION:-

Example – 09

A Ltd is an electronic firm

FCFF1 = 1,75,000

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RF = 7%

RM = 13%

D/E = 1:3

Calculate Value of A Ltd.

B Ltd. is similar electronic firm

BE = 1.75

D/E = 1:4

SOLUTION:-

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Example – 10

D/E = 2:3

BA = 1.20

BD = 0.40

BE =?

SOLUTION:-

Example – 11

FCFF1 = ₹ 80,000

BA = 1.15

D/E = 2:3

RF = 10%

RM = 15%

Tax = 30%

Value of company = ?

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SOLUTION:-

QUESTION – 38

The total market value of the equity share of O.R.E. company is ₹ 60,00,000
and the total value of the debts is ₹ 40,00,000. The treasure estimate that the
beta of the stock is currently 1.5 and that the expected risk premium on the
market is 10%. The treasury bill rate is 8%.

Required:

(1) What is the beta of the company’s existing portfolio of assets?

(2) Estimate the company’s cost of capital and the discount rate for an
expansion of the company’s business.

SOLUTION:

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QUESTION – 39

Equity of KGF Ltd. (KGFL) is ₹ 410 Crores, its debt, is worth ₹ 170 Crores.
Printer Division segments value is attributable to 74%, which has an Asset
Beta (βp) of 1.45, balance value is applied on Spares and Consumables
Division, which has an Asset Beta (βsc) of 1.20 KGFL Debt beta (βD) is 0.24.

You are required to calculate:

(i) Equity Beta (βE),

(ii) Ascertain Equity Beta (βE), if KGF Ltd. decides to change its Debt Equity
position by raising further debt and buying back of equity to have its
Debt Equity Ratio at 1.90. Assume that the present Debt Beta (βD1) is
0.35 and any further funds raised by way of Debt will have a Beta (βD2) of
0.40.

(iii) Whether the new Equity Beta (β E) justifies increase in the value of equity
on account of leverage?

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SOLUTION:

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QUESTION – 40

STR Ltd.’s current financial year's income statement reported its net income
after tax as ₹ 50 Crore.

Following is the capital structure of STR Ltd. at the end of current financial
year:

₹
Debt (Coupon rate = 11%) 80 Crore
Equity (Share Capital + Reserves & Surplus) 250 Crore
Invested Capital 330 Crore

Following data is given to estimate cost of equity capital:

Asset Beta of TSR Ltd. 1.11

Risk free rate of return 8.5%
Average market risk premium 9%

The applicable corporate income tax rate is 30%.

Estimate Economic Value added (EVA) of RST Ltd. in ₹ lakh.

(RTP November – 2021 & MTP October – 2020)

SOLUTION:-

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QUESTION – 41

ABC, a large business house is planning to sell its wholly owned subsidiary
KLM. Another large business entity XYZ has expressed its interest in making a
bid for KLM. XYZ expects that after acquisition the annual earning of KLM will
increase by 10%.

Following information, ignoring any potential synergistic benefits arising out of

possible acquisitions, are available:

(i) Profit after tax for KLM for the financial year which has just ended is
estimated to be ₹ 10 crore.

(ii) KLM's after tax profit has an increasing trend of 7% each year and the
same is expected to continue.

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(iii) Estimated post tax market return is 10% and risk free rate is 4%. These
rates are expected to continue.

(iv) Corporate tax rate is 30%.

XYZ ABC Proxy entity for

KLM in the same
line of business
No. of shares 100 lakhs 80 lakhs --
Current share price ₹ 287 ₹ 375 --
Dividend pay out 40% 50% 50%
Debt : Equity at 1:2 1:3 1:4
market values
P/E ratio 10 13 12
Equity beta 1 1. 1 1.1

Assume gearing level of KLM to be the same as for ABC and a debt beta of zero.
You are required to calculate:

(a) Appropriate cost of equity for KLM based on the data available for the
proxy entity.

(b) A range of values for KLM both before and after any potential synergistic
benefits to XYZ of the acquisition.

(Practice Manual)

SOLUTION:

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