CASE STUDY 1

Mr. Dev, a research analyst, has been hired to value RC Ltd., a company that is
currently experiencing rapid growth and expansion. Dev is an expert in the
communications industry and has had extensive experience in valuing similar
firms. He is convinced that a value for the equity of RC Ltd. can be reliably
obtained through the use of a three-stage free cash flow to equity (FCFE)
model with declining growth in the second stage. Based on up-to-date financial
statements, he has determined that the current FCFE per share is Rs.1.00. He
has prepared a forecast of expected growth rates in FCFE as follows:
Stage 1: 8% for years 1 through 3
Stage 2: 7.0% in year 4, 6.5% in year 5, 6.0% in year 6
Stage 3: 4.0% in year 7 and thereafter Moreover, Dev has determined that the
company has a beta of 1.6. The current risk-free rate is 3.0%, and the equity
risk premium is 5.0%. Other financial information: Outstanding shares: 100
lakh shares
Tax rate: 40.0% Interest expense: Rs.30,00,000

1.The required rate of return is closest to ____________.

a) 10.012% b) 7.062% c) 0.062% c) 11.065%

2.The terminal value in year 6 is closest to __________.

a) Rs.22.57 b) Rs.20.42 c) Rs.24.30 d) Rs.25.70

3. The per share value Dev should assign to RC Ltd. is closest to ___________.

a) Rs.15.35 b) Rs.20.86 c) Rs.17.35 d) Rs.18.46

4. The free cash flow to the firm (FCFF) is closest to ___________

a) Rs.130 lakh b) Rs.112 lakh c) Rs.118 lakh d) Rs.124 lakh

CASE STUDY 2
You have developed the following projections for Optex Limited :

In million
years
Particulars 1 2 3 4 5
Free cash 200 250 300 340 380
flow to the
firm
Interest 500 400 300 200 100
bearing debt
Interest 60 48 36 24 12
expense
Calculate the enterprise value of Optex Limited using the following
assumptions:

 Beyond year 5,the free cash flow to the firm of Optex will grow at a
constant rate of 10% per annum.
 Optex’s unlevered cost of equity is 14%.
 After year 5,optex will maintain a debt-equity ratio of 4:7.
 The borrowing rate for optex will be 12%.
 The tax rate for optex is 30%.
 The risk-free rate is 8%.
 The market risk premium is 6%.
 The present value of the unlevered equity free cash flow (which is the same
as the free cash flow to firm) during the planning period is:

1.Beta for the levered company equity ____________.

a) 1.04 b) .014 c) 1.4 c) 1

2.cost of levered equity __________.

a) 15.5% b) 16.4% c) 14% d) 0.14 %

3. WACC ___________.

a) 13.49 b) 14 c)13 d) 15
4. The enterprise value closest to ___________

a) 6434.4mil b) 6220.5mil c) 7220.5mil d) 7434.4mil

CASE STUDY 3

AZ Ltd. is considering to acquire BC Ltd. for the expansion of business

operation. It is considering ‘income approach’ for the valuation of the business
of BC Ltd. In income approach of business valuation, a business is valued at the
present value of its future earnings or cash flows. Future earnings/cash flows are
determined by projecting the business’s earnings/cash flows and adjusting them
for changes in growth rate, cost structure and taxes, etc. The present value is
determined using a discount rate which reflects the required rate of return of the
investor. The busineses of AZ Ltd. and BC Ltd are valued at Rs.100 crore and
Rs.25 crore respectively. The growth rate of BC Ltd. is 8% and of AZ Ltd. is
16%. The required rate of returns of AZ Ltd. and BC Ltd. are 18% and 12%
respectively. PATs of the AZ Ltd. and BC Ltd. are Rs.1000 crore and Rs.450
crore respectively. (d = Discount rate, g = Growth rate)

1. What is the annual future earnings of the AZ Ltd. using ‘Capitalization

of Earning Method’?

a) Rs.150 crore
b) Rs.180 crore
c) Rs.200 crore
d) Rs.190 crore

2. Which of the following is the capitalization rate of the BC Ltd.?

a) 5.0%
b) 3 %
c) 4%
d) 4.5%

3. There are two income-based approaches that are primarily used when
valuing a business, the Capitalization of Cash Flow Method and the
___________.

a) Net Present Value Method

b) IRR Method
c) Discounted Cash Flow Method
d) Discounted Payback Period
CASE STUDY 4
The following details to
calculate value
Peer EV/EBITD EV/Sale
Companies A s
A 14 2.5
B 16 3.5
C 18 5.5

Details of
Company X
Sales 10 crores
EAT 50Lacs
Interest Cost 40Lacs
Depreciation 20 Lacs
Other Fixed
Cost 5 Lacs
Debt 8 Crores
Rate of
Interest 6%
Beta 1.4
Rf 7%
RiskPremium
(Rm-Rf) 6%
D/E ratio 1
Taxrate 20%

1.The value of the X company based on mean EV/EBITDA is ____________.

a) 17.6cr b) 19.6 Cr c) 8.6cr c) 122.5 cr

2.The value of the X company based on mean EV/Sales __________.

a) 25cr b) 115 cr c) 35 cr d) 55cr

3. cost of equity ___________.

a) 13% b) 12% c) 14.5% d)15%

4. WACC ___________

a) 9.1% b) 10.1% c) 8.1% d) 11.1%

CASE STUDY 5

Arjmeer Textiles Pvt. Ltd. Is one of the leading dying and printing units in its
locality. The directors of the company are planning reverse integration by
starting a weaving unit attached to the current facility. They have checked the
feasibility of profitability of the venture and are keen to start work on the same
as soon as possible.

The director had originally planned to raise the required funds internally, by
investing private savings and getting unsecured loans. But before any moves
can be finalised or implemented, sate government announced interest subsidy
on the weaving unit.

For the purpose of obtaining subsidy, the loan had to be from nationalised
banks only. The directors approached a nationalised bank for the loan.
Amongst the requirements of the documents to be submitted, the bank had
listed a valuation report of the existing business of the entities seeking loans.

You were approached by Arjmeer Textiles pvt. Ltd.’s directors to carry out the
valuation assignment and issue them with the report on the same.

Questions:

1. Which is the most appropriate approach of valuation for this assignment?

a. Cost approach
b. Market approach
c. Income approach
d. All of the above

ANS: d. all of the above

Because, this valuation is possible by the cost approach, as we can easily

estimate the replacement of reproduction cost of the assets, market parallels
also can be easily found as it is a textile business, and most of the machines
used are general in the industry. Also the future income and cashflows can be
predicted. Hence, any of the approach can be used.
2.suppose, the valuation is carried out by the comparable transactions
method. Which of the following steps will be included in the valuation
process?
i. identify the units of comparison that are used by the participants in the
relevant market.
ii. apply the adjusted valuation metrices to subject assets.
iii. choose the most appropriate type of cashflows for the nature of subject
asset and the assignment.
iv. make necessary adjustments, if any, to the valuations metrics t reflect
differences between the subject asset and the comparabe assets.

a. All of i,ii,iii,iv
b. I,iii,iv
c. I,ii,iv
d. Ii,iv

Ans: C. The third point “choose the most appropriate type of cashflow for the
nature of subject asset and the assignment” is a part of discounted cashflow
method.

3.what can be the differences that may requie adjustments between the
comparable transactions and the subject asset?
a. Material characteristics.
b. Historical and expected growth
c. Geographical location
d. All of the above

Ans: D. All of the above

CASE STUDY-6

An equity index is established in 2001 for a country that has relatively recently
established a market economy. The index vendor constructed returns for the
five years prior to 2001based on the initial group of companies constituting the
index in 2001. Over 2004 to 2006 a series of military confrontations concerning
a disputed border disrupted the economy and financial markets. The dispute is
conclusively arbitrated at the end of 2006.In total, 10 years of equity market
return history is available as of the beginning of 2007. The geometric mean
return relative to 10 - year government bond returns over 10 years is 2 percent
per year. The forward dividend yield on the index is 1 percent. Stock returns
over 2004 to 2006 reflect the setbacks but economists predict the country will
be on a path of a 4 percent real GDP growth rate by 2009. Earnings in the public
corporate sector are expected to grow at a 5 percent per year real growth rate.
Consistent with that, the market P/E ratio is expected to grow at 1 percent per
year. Although inflation is currently high at 6 percent per year, the long - term
forecast is for an inflation rate of 4 percent per year. Although the yield curve
has usually been upward sloping, currently the government yield curve is
inverted; at the short end, yields are 9 percent and at 10 – year maturities, yields
are 7 percent.

1. The inclusion of index returns prior to 2001 would be expected to

A. Bias the historical equity risk premium estimate upwards.
B. Bias the historical equity risk premium estimate downwards.
C. Have no effect on the historical equity risk premium estimate.

2. The events of 2004 to 2006 would be expected to

A. Bias the historical equity risk premium estimate upwards.
B. Bias the historical equity risk premium estimate downwards.
C. Have no effect on the historical equity risk premium estimate.

3. Common stock issues in this market with average systematic risk are
most likely to have required rates of return
A. Between 2 percent and 7 percent.
B. Between 7 percent and 9 percent.
C. At 9 percent or greater.