Corporate Valuation

Corporate ValuationCorporate Valuation

Use of Different TermsUse of Different Terms

CORPORATE VALUATIONCORPORATE VALUATION

In the context of M&A, value means economic value i.e. amount to be paid In the context of M&A, value means economic value i.e. amount to be paid

in exchange for an asset or the right to receive future benefits from the use in exchange for an asset or the right to receive future benefits from the use

of that asset. Economic value is, therefore, the monetary worth of an asset.of that asset. Economic value is, therefore, the monetary worth of an asset.

Various concept s of valueVarious concept s of value

Fair market value – amount mutually accepted by buyer & sellerFair market value – amount mutually accepted by buyer & seller

Investment value – value of the future benefits of ownershipInvestment value – value of the future benefits of ownership

Fair value – statutory standard of valueFair value – statutory standard of value

Intrinsic value – value, especially of stocks, based on earning power Intrinsic value – value, especially of stocks, based on earning power

and earnings quality of the investmentand earnings quality of the investment

Goodwill value – difference between the price paid and the fair valueGoodwill value – difference between the price paid and the fair value

Going concern value – value of the maintainable income of the firm at a Going concern value – value of the maintainable income of the firm at a

suitable capitalisation ratesuitable capitalisation rate

Book value – net worth or book equityBook value – net worth or book equity

CORPORATE VALUATIONCORPORATE VALUATION

Liquidation value – forced and orderlyLiquidation value – forced and orderly

Replacement valueReplacement value

Salvage valueSalvage value

VALUATION APPROACHESVALUATION APPROACHES

4 broad approaches to appraising value of a company4 broad approaches to appraising value of a company

Adjusted book value approachAdjusted book value approach

Stock and debt approachStock and debt approach

Direct comparison approachDirect comparison approach

Discounted cash flow (DCF) approachDiscounted cash flow (DCF) approach

Adjusted Book Value ApproachAdjusted Book Value Approach

Based on data found in balance sheetBased on data found in balance sheet

First book values of investor claims summedFirst book values of investor claims summed

Second, total non-investor claims (accounts payable) Second, total non-investor claims (accounts payable)

deducted from total assets of the companydeducted from total assets of the company

ADJUSTED BOOK VALUE APPROACHADJUSTED BOOK VALUE APPROACH

Liabilities Rs. Mn Assets Rs. MnEquity share capital 15.00 Fixed Assets (Net) 33.00Reserves & Surplus 11.20 Gross Block 59.00Secured Loans 14.30 Depreciation 26.00

Term loans 7.00 Investments 1.50Debentures 7.30 Current assets, loans & advances 23.40

Unsecured Loans 6.90 cash & bank 1.00Bank credit 2.50 Debtors 11.40Inter corporate loans 4.40 Inventories 10.50

Current liabilities and provisions 10.50 Pre-paid exp 0.50Miscellaneous exp & Losses

Total 57.90 Total 57.90

Investor Claims Approach Rs. Mn Asset-Liabilites Approach Rs. MnEquity share capital 15.00 Total assets 57.90Reserves & Surplus 11.20 Less : Non investor claims (currentSecured Loans 14.30 liabilites & provision) 10.50Unsecured Loans 6.90Total 47.40 47.40

Balance Sheet of Horizon Ltd.

Balance Sheet Valuation


Accuracy of the book value approach depends on how well the net book values Accuracy of the book value approach depends on how well the net book values

of the assets reflect their fair market values. 3 reasons why book values may of the assets reflect their fair market values. 3 reasons why book values may

diverge from market valuesdiverge from market values

Inflation – book value typically at historical cost less depreciation. Does not Inflation – book value typically at historical cost less depreciation. Does not

consider inflationconsider inflation

Obsolescence – assets may be obsolete though not yet fully depreciatedObsolescence – assets may be obsolete though not yet fully depreciated

Organisational capital/ goodwill – not shown in the balance sheet but Organisational capital/ goodwill – not shown in the balance sheet but

influences market valueinfluences market value

Adjusting book value to reflect replacement cost : Though asset’s earning power Adjusting book value to reflect replacement cost : Though asset’s earning power

not directly related to book value, in case the asset is old, it is likely to be related not directly related to book value, in case the asset is old, it is likely to be related

to current replacement costto current replacement cost

Cash – no changeCash – no change

Debtors – usually at face value but allowance for bad debts based on Debtors – usually at face value but allowance for bad debts based on

quality of debtorsquality of debtors


Inventory – RM – current cost of acquisition, WIP – process cost, FG – Inventory – RM – current cost of acquisition, WIP – process cost, FG –

realizable sales pricerealizable sales price

Other current assets – deposits, prepaid exp, accruals etc. – at face valueOther current assets – deposits, prepaid exp, accruals etc. – at face value

Fixed assetsFixed assets

• Land – market valueLand – market value

• Bldg & civil works – replacement cost less physical depreciation and Bldg & civil works – replacement cost less physical depreciation and

deteriorationdeterioration

• P&M – mkt price of used asset+cost of transportation and installationP&M – mkt price of used asset+cost of transportation and installation

Non operating assets – investments (securities, land, property etc.) – valued at Non operating assets – investments (securities, land, property etc.) – valued at

fair market valuefair market value

Adjusting book values to reflect liquidation values Adjusting book values to reflect liquidation values

In case of active secondary market, then liquidation value equals market priceIn case of active secondary market, then liquidation value equals market price

Lack of active secondary markets for many assets. Hence technical appraisal a Lack of active secondary markets for many assets. Hence technical appraisal a

must to arrive at hypothetical price of the assetmust to arrive at hypothetical price of the asset


Two weaknesses with this approachTwo weaknesses with this approach

Ignores organisation capital/ goodwillIgnores organisation capital/ goodwill

Does not value the firm as a going Does not value the firm as a going

concern; considers piecemeal sale of concern; considers piecemeal sale of

assets and hence relevant in case of a firm assets and hence relevant in case of a firm

which is expected to decline.which is expected to decline.

This approach has limited applicability due to This approach has limited applicability due to

the above reasons.the above reasons.

STOCK AND DEBT APPROACHSTOCK AND DEBT APPROACH

When securities of a firm are publicly traded, firm value = summation of market value When securities of a firm are publicly traded, firm value = summation of market value

of all outstanding securitiesof all outstanding securities

Commonly used by property tax appraisers. Also referred to as market approachCommonly used by property tax appraisers. Also referred to as market approach

Issues arise about what prices to use when valuing the securities particularly equity Issues arise about what prices to use when valuing the securities particularly equity

shares. Usually averaging recommended to overcome volatility – logic is that shares. Usually averaging recommended to overcome volatility – logic is that

averaging provides more reliable estimate of the firm’s true underlying value.averaging provides more reliable estimate of the firm’s true underlying value.

However, averaging implies lack of efficient stock markets. If prices reflect all However, averaging implies lack of efficient stock markets. If prices reflect all

publicly available information, then no need for averagingpublicly available information, then no need for averaging

2 important points to remember2 important points to remember

Where stock and debt approach can be employed, will produce the most reliable Where stock and debt approach can be employed, will produce the most reliable

estimate of valueestimate of value

In case of efficient markets, securities should be valued at the lien date (day on In case of efficient markets, securities should be valued at the lien date (day on

which appraiser is attempting to value). Averaging should be avoided as it which appraiser is attempting to value). Averaging should be avoided as it

reduces the accuracy of appraisalreduces the accuracy of appraisal

DIRECT COMPARISON DIRECT COMPARISON APPROACHAPPROACH

Value an asset by looking at the price at which a comparable asset has Value an asset by looking at the price at which a comparable asset has

changed hands between a reasonably informed buyer and seller. changed hands between a reasonably informed buyer and seller.

Commonly applied in real estate. However, impact in differences of Commonly applied in real estate. However, impact in differences of

scale have to be factoredscale have to be factored

The approach can be reflected in a simple formulaThe approach can be reflected in a simple formula

VVTT = X = Xt t * V* VC C / X/ Xcc , , wherewhere

VVTT = appraised value of target firm/ asset = appraised value of target firm/ asset

XXt t = observed variable for target firm that drives value= observed variable for target firm that drives value

VVC C = value of comparable firm = value of comparable firm

XXc c = observed variable for comparable company = observed variable for comparable company

DIRECT COMPARISON APPROACHDIRECT COMPARISON APPROACH

Data sheet for company D Rs. MnPBIDT 18Book value of assets 90Sales 125

Data Sheet for comparable companies A, B & CA B C

PBIDT 12 15 20Book value of assets 75 80 100Sales 80 100 160Market value (M/V) 150 240 360MV/ PBIDT 12.50 16.00 18.00MV/ Book Value 2.00 3.00 3.60MV/ Sales 1.88 2.40 2.25

Multiples most suitable to DValue after applying multiple Rs. Mn

MV/ PBIDT 17 MV = 17*PBDIT (18) 306MV/ Book Value 3 MV = 3*BV (90) 270MV/ Sales 2.2 MV = 2.2*Sales (125) 275

Average 283.66667

STEPS IN DIRECT COMPARISON STEPS IN DIRECT COMPARISON APPROACHAPPROACH

Analyse the economyAnalyse the economy

Analyse the industryAnalyse the industry

Analyse the subject companyAnalyse the subject company

Select comparable companiesSelect comparable companies

Analyse subject and comparable companiesAnalyse subject and comparable companies

Analyse multiplesAnalyse multiples

Care should be taken to choose appropriate variable. Usually financial variables Care should be taken to choose appropriate variable. Usually financial variables

chosenchosen

Consistency essential while comparing variablesConsistency essential while comparing variables

Few commonly used ratios/ multiplesFew commonly used ratios/ multiples

• Firm value to salesFirm value to sales

• Firm value to book value of assetsFirm value to book value of assets

• Firm value to PBIDTFirm value to PBIDT

• Firm value to PBITFirm value to PBIT

• P/ E multipleP/ E multiple

• Equity value to net worth (market-book ratio)Equity value to net worth (market-book ratio)

Value the subject company Value the subject company

STEPS IN DIRECT COMPARISON STEPS IN DIRECT COMPARISON APPROACHAPPROACH

It is a popular method because it relies on multiples that are easy It is a popular method because it relies on multiples that are easy

to getto get

Especially useful when comparable companies are traded and Especially useful when comparable companies are traded and

priced fairlypriced fairly

However, few drawbacks existHowever, few drawbacks exist

Multiples amenable to misuse and manipulationMultiples amenable to misuse and manipulation

Choice of comparable companies subjective as companies Choice of comparable companies subjective as companies

differ in terms of risk and growthdiffer in terms of risk and growth

Multiples used reflect valuation errors (under or over) of the Multiples used reflect valuation errors (under or over) of the

market. E.g., software companiesmarket. E.g., software companies

Exercise 1Exercise 1

Novelty, a consumer durable manufacturer, reported earnings Novelty, a consumer durable manufacturer, reported earnings per share of Rs.3.20 in 2005 and paid dividends per share of per share of Rs.3.20 in 2005 and paid dividends per share of Rs.1.7 in that year. The firm reported depreciation of Rs.350 Rs.1.7 in that year. The firm reported depreciation of Rs.350 lakh in 2005 and capital expenditures of Rs.475 lakh. There lakh in 2005 and capital expenditures of Rs.475 lakh. There were 160 lakh outstanding shares traded at Rs.51 per share. were 160 lakh outstanding shares traded at Rs.51 per share. The ratio of capital expenditure to depreciation is expected to The ratio of capital expenditure to depreciation is expected to be maintained in the long term. The working capital needs are be maintained in the long term. The working capital needs are negligible. Novelty had a debt outstanding of Rs.1600 lakh and negligible. Novelty had a debt outstanding of Rs.1600 lakh and intends to maintain its current financing mix of debt and equity intends to maintain its current financing mix of debt and equity to finance future investment needs. The firm is in the steady to finance future investment needs. The firm is in the steady state, and earnings are expected to grow at 7% per year. The state, and earnings are expected to grow at 7% per year. The stock had a Beta of 1.05, the Treasury bill rate is 6.25% and the stock had a Beta of 1.05, the Treasury bill rate is 6.25% and the market premium is 5.5%.market premium is 5.5%.

a.a. Estimate the value per share using the dividend discount Estimate the value per share using the dividend discount model.model.

b.b. Estimate the value per share, using the FCFE model.Estimate the value per share, using the FCFE model.c.c. How would you explain the difference between the two How would you explain the difference between the two

models, and which one would you use as a benchmark to models, and which one would you use as a benchmark to compare with the market price?compare with the market price?

Solution 1Solution 1Earnings per share = Rs.3.2Earnings per share = Rs.3.2Dividend per share = Rs.1.7Dividend per share = Rs.1.7Depreciation = Rs.350 lakhDepreciation = Rs.350 lakhCapital Expenditure = Rs.475 lakhCapital Expenditure = Rs.475 lakhNumber of shares = 160 lakhNumber of shares = 160 lakhMarket price per share = Rs.51 per shareMarket price per share = Rs.51 per shareCost of Equity: ke = Rf + β (Rm – Rf)Cost of Equity: ke = Rf + β (Rm – Rf)

= 6.25 + 1.05 (5.5)= 6.25 + 1.05 (5.5)= 12.025%= 12.025%

a.a. Estimation of Value per Share using the Dividend Discount ModelEstimation of Value per Share using the Dividend Discount Model Value of equity = D1 / (ke – g)Value of equity = D1 / (ke – g) D1 = D0 (1 + g)D1 = D0 (1 + g) Value of Equity = 1.70 (1.07) / (0.12025 – 0.07)Value of Equity = 1.70 (1.07) / (0.12025 – 0.07)

= 1.819 / 0.05025 = Rs.36.199= 1.819 / 0.05025 = Rs.36.199 or Rs.36.20 app.or Rs.36.20 app.

Solution 1 Contd.Solution 1 Contd.b.b. Estimation of Value per Share using the FCFE ModelEstimation of Value per Share using the FCFE Model FCFE = Net income – (Capital expenditure – Depreciation) (1 – Debt FCFE = Net income – (Capital expenditure – Depreciation) (1 – Debt

financing ratio) – Change in working capital (1 – Debt financing ratio)financing ratio) – Change in working capital (1 – Debt financing ratio) Depreciation per share = 350 / 160 = Rs.2.1875Depreciation per share = 350 / 160 = Rs.2.1875 Capital expenditure per share = 475 / 160 = Rs.2.968Capital expenditure per share = 475 / 160 = Rs.2.968 Debt financing ratio = Debt / (Debt + Equity) = 1,600 / (1,600 + 8,160) Debt financing ratio = Debt / (Debt + Equity) = 1,600 / (1,600 + 8,160)

= 16.39%= 16.39% FCFE FCFE = 3.2 – (2.968 – 2.1875) (1 – 0.1639)= 3.2 – (2.968 – 2.1875) (1 – 0.1639) = 3.2 – (0.7805) (0.8361) = Rs.2.5474= 3.2 – (0.7805) (0.8361) = Rs.2.5474 Value of the shareValue of the share = 2.5474 (1.07) / (0.12025 – 0.07)= 2.5474 (1.07) / (0.12025 – 0.07) = 2.7257 / 0.05025 = Rs.54.24= 2.7257 / 0.05025 = Rs.54.24c.c. The FCFE is greater than the dividends paid. The higher value from the The FCFE is greater than the dividends paid. The higher value from the

model reflects the additional value from the cash accumulated in the model reflects the additional value from the cash accumulated in the firm. The FCFE is a more suitable model because it is a more realistic firm. The FCFE is a more suitable model because it is a more realistic model.model.


Sun Ltd. projects the following figures for the financial year Sun Ltd. projects the following figures for the financial year 2008-2009.2008-2009.

Net Income after tax = Rs.130 crores.Net Income after tax = Rs.130 crores. Depreciation = Rs.50 crores.Depreciation = Rs.50 crores. Capital expenditure planned = Rs.80 crores.Capital expenditure planned = Rs.80 crores. Additional working capital needed = Rs.25 crores.Additional working capital needed = Rs.25 crores. Principal repayment of debt = Rs.10 crores.Principal repayment of debt = Rs.10 crores. As the firm has a very low debt equity ratio , it plans to As the firm has a very low debt equity ratio , it plans to

increase its leverage by financing debt repayment and 30% of increase its leverage by financing debt repayment and 30% of the planned capital expenditure and additional working capital the planned capital expenditure and additional working capital needs by raising fresh debt.needs by raising fresh debt.

Project the free cash flow to equity for 2008-2009.Project the free cash flow to equity for 2008-2009.

Solution 2Solution 2 Free Cash flow to equity (FCFE) = Net income after tax + Free Cash flow to equity (FCFE) = Net income after tax +

depreciation - Capital expendituredepreciation - Capital expenditure working capital+ proceeds from working capital+ proceeds from new debt issues.new debt issues.

Step 1 = calculate new debt issued in 2008-09.Step 1 = calculate new debt issued in 2008-09. New debt = principal repayment + 30% of capital expenditure and New debt = principal repayment + 30% of capital expenditure and

working capital =10crores + 0.3(80+25 crores) =41.5 crores.working capital =10crores + 0.3(80+25 crores) =41.5 crores. Step 2 = calculate FCFEStep 2 = calculate FCFE Rs.Cr Rs.Cr Net income after tax 130Net income after tax 130 Add depreciation 50Add depreciation 50 less capital exp. -80less capital exp. -80 less working capital -25less working capital -25 less debt repayment -10less debt repayment -10 add new debt issued 41.5add new debt issued 41.5 Free cash flow to equity 106.5Free cash flow to equity 106.5

Exercise 3Exercise 3 Z Ltd. Is planning a public issue and would like to value the Z Ltd. Is planning a public issue and would like to value the

company using the comparable companies approach. Based on company using the comparable companies approach. Based on the following data from 2 comparable companies X / Y Ltd. the following data from 2 comparable companies X / Y Ltd. identify 4 ratios / indicators for comparable analysis and value identify 4 ratios / indicators for comparable analysis and value Z Ltd. Give equal weight age to all the ratios / indicators in the Z Ltd. Give equal weight age to all the ratios / indicators in the valuation.valuation.

X Ltd.X Ltd. Y Ltd.Y Ltd. Z Ltd.Z Ltd.

Market Value MVMarket Value MV Rs.900Rs.900 Rs.800Rs.800 ????

Book Value BVBook Value BV 800800 600600 500500

Replacement valueReplacement value 12001200 11001100 10001000

Sales revenuesSales revenues 11001100 900900 10001000

Profit After Tax (PAT)Profit After Tax (PAT) 3636 3232 2828

Solution 3Solution 3Step 1 - Identify and Estimate ratios / indicators of comparable companies X/Y Step 1 - Identify and Estimate ratios / indicators of comparable companies X/Y

Ltd.Ltd.

Step 2 - Apply the average comparable ratios to the data of Z Ltd.Step 2 - Apply the average comparable ratios to the data of Z Ltd. Z Ltd. Avg .ratio Value of Z Ltd.Z Ltd. Avg .ratio Value of Z Ltd.

Average of the 4 values 726.69Average of the 4 values 726.69So market value of Z Ltd. Will be say Rs. 727.So market value of Z Ltd. Will be say Rs. 727.

Ratio / indicatorRatio / indicator X Ltd.X Ltd. Y Ltd. Y Ltd. AverageAverage

MV / BVMV / BV 1.1251.125 1.331.33 1.231.23

MV / Repl. costMV / Repl. cost 0.750.75 0.730.73 0.740.74

MV / SalesMV / Sales 0.820.82 0.890.89 0.850.85

MV / PATMV / PAT 2525 2525 25.0025.00

BVBV 500500 1.231.23 615615

Repl. costRepl. cost 10001000 0.740.74 739739

SalesSales 10001000 0.850.85 854854

PATPAT 2828 25.0025.00 700700

29072907


The following details are available with regard to the projected operations of The following details are available with regard to the projected operations of Pragati Enterprises Ltd.Pragati Enterprises Ltd.

Year Year 11 22 33 44 55

SalesSales 120120 132132 145145 159159 175175

Operating expensesOperating expenses 5353 5858 6262 6767 7373

DepreciationDepreciation 1111 1010 1010 1212 1212

YearYear 11 22 33 44 55

Investment in net current assets at the beginning of the Investment in net current assets at the beginning of the yearyear

66 55 66 77 55

Investment in fixed assets at the beginning of the yearInvestment in fixed assets at the beginning of the year 3030 2020 1010 00 00

YearYear Post-tax non-operating cash flowsPost-tax non-operating cash flows

11 1212

33 88

55 2222

Exercise 4 Contd.Exercise 4 Contd.

The company has long-term debt carrying an interest The company has long-term debt carrying an interest rate of 12.5% and has some non-interest bearing rate of 12.5% and has some non-interest bearing current liabilities. The cost of equity capital is 16 current liabilities. The cost of equity capital is 16 percent. The company does not have any other long-percent. The company does not have any other long-term sources of finance. The market value of equity is term sources of finance. The market value of equity is Rs.50 lakh and the market value of debt is Rs.30 lakh. Rs.50 lakh and the market value of debt is Rs.30 lakh. The effective tax rate applicable to the company is 36 The effective tax rate applicable to the company is 36 percent. From the sixth year onwards, the free cash percent. From the sixth year onwards, the free cash flow of the company is expected to grow at the rate of flow of the company is expected to grow at the rate of 8 percent per annum.8 percent per annum.

You are required to calculate the value of the You are required to calculate the value of the company using the discounted cash flow approach.company using the discounted cash flow approach.

Solution 4Solution 4Gross cash flow for the explicit forecast periodGross cash flow for the explicit forecast period

Calculation of gross investmentCalculation of gross investment

YearYear 11 22 33 44 55

A. SalesA. Sales 120120 132132 145145 159159 175175

B. Operating expensesB. Operating expenses 5353 5858 6262 6767 7373

C. DepreciationC. Depreciation 1111 1010 1010 1212 1212

D. EBITD. EBIT 5656 6464 7373 8080 9090

E. Taxes = EBIT (t)E. Taxes = EBIT (t) 20.220.2 23.023.0 26.326.3 28.828.8 32.432.4

F. NOPLAT = EBIT (1-t)F. NOPLAT = EBIT (1-t) 35.835.8 4141 46.746.7 51.251.2 57.657.6

G. Gross cash flow = F + CG. Gross cash flow = F + C 46.846.8 5151 56.756.7 63.263.2 69.669.6

YearYear 11 22 33 44 55

A. Investment in net current assetsA. Investment in net current assets 66 55 66 77 55

B. Investment in fixed assetsB. Investment in fixed assets 3030 2020 1010 00 00

C. Gross investment = A + BC. Gross investment = A + B 3636 2525 1616 77 55

Solution 4 contd.Solution 4 contd.Calculation of free cash flow (Rs. in lakh)Calculation of free cash flow (Rs. in lakh)

Cost of capital = (k) = Cost of capital = (k) = 3030 0.125 (1 – 0.36) + 0.125 (1 – 0.36) + 5050 0.16 = 0.13 i.e.13% 0.16 = 0.13 i.e.13% 30+50 30+5030+50 30+50Present value of free cash flow = Present value of free cash flow = 22.822.8 + + 2626 + + 48.748.7 + + 56.256.2 + + 86.6 86.6 = Rs.155.76 lakh = Rs.155.76 lakh1.13 1.131.13 1.1322 1.13 1.1333 1.13 1.1344 1.13 1.1355

Continuing value = Continuing value = 86.6 x 1.0886.6 x 1.08 0.13 – 0.080.13 – 0.08 = 1870.56= 1870.56

YearYear 11 22 33 44 55

A. Gross cash flowA. Gross cash flow 46.846.8 5151 56.756.7 63.263.2 69.669.6

B. Gross investmentB. Gross investment 3636 2525 1616 77 55

C. Free cash flow from operations (A-B)C. Free cash flow from operations (A-B) 10.810.8 2626 40.740.7 56.256.2 64.664.6

D. Non-operating cash flowD. Non-operating cash flow 1212 00 88 00 2222

E. Free cash flow (C + D)E. Free cash flow (C + D) 22.822.8 2626 48.748.7 56.256.2 86.686.6

Solution 4 Contd.Solution 4 Contd.

PV of Continuing value = PV of Continuing value = 1870.561870.56

(1.13)(1.13)55

= 1015.27 L= 1015.27 L

Value of the firm = 1015.27 + 155.76Value of the firm = 1015.27 + 155.76

= 1171.03 L= 1171.03 L

Exercise 5 Exercise 5 Amol Industries is in Professional Services business.The company Amol Industries is in Professional Services business.The company

financial are as follows:financial are as follows:Rs.inRs.inMillionMillion

SalesSales 1010

EBDITEBDIT 66

DepreciationDepreciation 11

Tax rateTax rate 40%40%

Net Fixed AssetsNet Fixed Assets 88

Net Current Assets (Will remain at 10% of Net Fixed Assets in Net Current Assets (Will remain at 10% of Net Fixed Assets in next 5 years) next 5 years)

11

Sales growth estimated in next 5 yearsSales growth estimated in next 5 years 10% p.a.10% p.a.

Op. Expenses grow byOp. Expenses grow by 8% p.a.8% p.a.

DepreciationDepreciation 10%10%

Post tax cost of debtPost tax cost of debt 8%8%

Market value of debtMarket value of debt 44

Cost of EquityCost of Equity 15%15%

Market value of EquityMarket value of Equity 1111

Estimated growth of free cash flow from 6th yearEstimated growth of free cash flow from 6th year 10% p.a.10% p.a.

Exercise 5 Contd.Exercise 5 Contd.

Year wise investments in Fixed Assets:Year wise investments in Fixed Assets:

(Rs.Million)(Rs.Million)

You are required to find out the value of Amol You are required to find out the value of Amol Industries.Industries.

YearYear 11 22 33 44 55

Investment in Fixed AssetsInvestment in Fixed Assets 2.02.0 00 1.01.0 1.51.5 00

Post-tax non-operating cash flowsPost-tax non-operating cash flows 1.01.0 00 0.50.5 2.02.0 00

Rs. Lakhs Rs. Lakhs

YearYear 11 22 33 44 55

SalesSales 110110 121121 133133 146146 161161

Op. ExpOp. Exp 4343 4747 5050 5454 5959

EBDITEBDIT 6767 7474 8383 9292 102102

Depreciation:Depreciation:

Net Fixed AssetsNet Fixed Assets 8080 9090 8181 8282 8787

Addn. at the beginning of the yearAddn. at the beginning of the year 2020 00 1010 1515 00

Depn. For the yearDepn. For the year 1010 99 99 1010 99

Net Fixed Assets at the end of the yearNet Fixed Assets at the end of the year 9090 8181 8282 8787 7878

EBITEBIT 5757 6565 7474 8282 9494

TaxesTaxes 2323 2626 2929 3333 3737

PAT (NOPLAT)PAT (NOPLAT) 3434 3939 4444 4949 5656

Gross Cash FlowGross Cash Flow 4444 4848 5353 5959 6565

Total Net Current AssetsTotal Net Current Assets 1010 99 99 1010 99

Net Current Assets at the beginning of the yearNet Current Assets at the beginning of the year 1010 1010 99 99 1010

Investment in net current assetsInvestment in net current assets 00 -1-1 00 11 -1-1

InvestmentsInvestments 2020 00 1010 1515 00

Gross InvestmentGross Investment 2020 -1-1 1010 1616 -1-1

Free Cash Flow:Free Cash Flow:

Gross Cash Flow:Gross Cash Flow: 4444 4848 5353 5959 6565

Gross InvestmentGross Investment 2020 -1-1 1010 1616 -1-1

Free cash flow from operationsFree cash flow from operations 2424 4949 4343 4343 6666

Non-operating cash flow`Non-operating cash flow` 1010 00 55 2020 00

Free cash flowFree cash flow 3434 4949 4848 6363 6666

Solution 5 Contd.Solution 5 Contd.Cost of Capital: (0.08*40/150) + (0.15*110/150) = 13.13%Cost of Capital: (0.08*40/150) + (0.15*110/150) = 13.13%

Present Value of Free Cash Flow:Present Value of Free Cash Flow:

Rs. LakhsRs. Lakhs

Discounted continuing Value: 66(1.1) / (0.1313 - 10) = 2319 x Discounted continuing Value: 66(1.1) / (0.1313 - 10) = 2319 x 11= 1251.7= 1251.7

1.13131.131355

Value of the firm = 176.10 + 1251.7 = 1428Value of the firm = 176.10 + 1251.7 = 1428

Market Value of Equity = 1388 lakhs.Market Value of Equity = 1388 lakhs.

YearYear

Free Cash flowFree Cash flow PV Factor`PV Factor` PVPV

11 3434 .8839.8839 30.1230.12

22 4949 .7813.7813 38.4538.45

33 4848 .6906.6906 33.2633.26

44 6363 .6104.6104 38.7538.75

55 6666 .5396.5396 35.5235.52

TotalTotal 176.10176.10

Corporate Valuation

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