Birla Institute of Technology & Science, Pilani, Hyderabad Campus

I Semester, 2021-22
Comprehensive Examination
Course No.: ECON F355 Marks: 35 Date: 17.12.2021
Course Title: Business Analysis and Valuation Duration: 3 hrs Time: 14:00-17:00

Part-A
Choose the correct alternatives: [email protected]=10
1. Which of the following is correct with regard to riskiness of a company vis-à-vis the
riskiness of a stock?
A. Riskiness of the company is expressed as cost of equity
B. Riskiness of the stock is expressed as Weighted Average cost of capital
C. Riskiness of the company is expressed as Weighted Average cost of capital
D. None of the Above

2. Which of the following is not an indicator of operating efficiency?

A. Operation profit margin
B. Capacity utilization
C. Interest coverage ratio
D. Asset utilizations

3. Under which cell would the strategic business units with low growth rate and high market
share come?
A. Dogs
B. Stars
C. Question Marks
D. Cash Cows

4. Tick the correct alternative/s:

i. Working capital is the amount of funds necessary to cover the operating cost of the
company.
ii. Company’s operating cash flow and book profit is different due to accrual concept of
accounting.
A. Both (i) and (ii) are correct
B. Only (i) is correct
C. Only (ii) is correct
D. Neither (i) nor (ii) is correct

5. Tick the correct alternative/s:

i. Circulating capital means current asset of a company that are not changed in the
ordinary forms of business from one form to another.
 ii. Sound operating cash flow of a company does not necessarily indicate good liquidity
position
A. Both (i) and (ii) are correct
B. Only (i) is correct
C. Only (ii) is correct
D. Neither (i) nor (ii) is correct
6. Which one of the following strategies is represented by the following picture?

A. Aggressive
B. Competitive
C. Defensive
D. Conservative

7. A firm with the SPACE Matrix analysis coordinates of (+2, -2) indicate the following
A. A firm with major competitive advantage in a high growth industry
B. An organization that is competing fairly well in an unstable industry
C. A firm whose financial strength is dominating factor in the industry
D. A firm that has a very weak, competitive position in a negative growth stable
industry

8. The reason for growing demand in “Business Analytics Industry” has been in response to
address which of the following blindspot?
A. Emphasis on Where, Not How, to Compete
B. Misjudging Industry Boundaries.
C. Faulty assumptions about the competition;
D. Paralysis by analysis.

9. Amortized loan indicates

A. At first stage, ratio of principal to interest in EMI is greater than one
B. At first stage, ratio of principal to interest in EMI is less than one
C. At first stage, ratio of principal to interest in EMI is equal to one
D. None of the above
10. Mini-Mini in SWOT matrix is a combination of
A. Firm’s strength in consideration of threat
B. Firm’s strength in consideration of opportunity
C. Firm’s weakness in consideration of threat
D. Firm’s weakness in consideration of opportunity

11. Which of the following defines the diluted earnings per share?
A. Profit after tax/No. of equity shares
B. Earnings before Interest and tax/ No. of equity shares
C. Profit after tax/ (No. of equity shares+ common stock equivalents)
D. Earnings before Interest and tax/ (No. of equity shares+ common stock
equivalents)

12. Suppose India Government rupees bond rate is 4% and the default spread for India is 2.5%.
What is the risk free rate in rupees for Indian investor and US investor?
A. 4% and 8%
B. 6% and 1.5%
C. 4% and 1.5%
D. 6% and 3%

13. Given beta=0.5, which of the following is/are true?

A. 10% change in market return leads to 2% change in stock return
B. 10% change in market return leads to 5% change in stock return
C. 10% change in stock return leads to 2% change in market return
D. 10% change in stock return leads to 5% change in market return

14. What does postponement of expense do for a company?

A. It increases the profit in short run but have severe consequence in long run
B. It decreases the profit in short run but have severe consequence in long run
C. It increases the profit in short run and have a positive consequence in long run
D. It decreases the profit in short run but have a positive consequence in long run

15. Given the constant capital expenditure model, as the marginal tax rate decreases, the return
on capital______.
A. Increases
B. Decreases
C. Remains constant
D. May increase or decrease

16. The determinant of return on equity is a combination of

A. Leverage and asset turnover ratio
B. Leverage and depreciation
C. Depreciation and asset turnover ratio
D. Leverage and depreciation
17. Which of the following defines the difference between the calculation of the value of the firm
and the value of the equity?
A. Value of the firm is calculated based on cash flow before payment to debt and
equity holders and value of equity is based on cash flow after all expenses.
B. Value of firm is based on cash flow after all expenses and value of the equity
is calculated based on cash flow before payment to debt holders.
C. Value of firm is based on cash flow after payment to debt but not to equity
holders but value of equity is based on cash flow after all expenses.
D. Value of firm is based on cash flow after payment to debt but not to equity
holders but value of equity is based on cash flow before payment to debt
holders.

18. Which of the following is a part of financial balance sheet but not a part of an accounting
balance sheet?
A. Current assets
B. Growth assets
C. Tangible assets
D. Intangible assets

19. Market value of capital is differentiated from its book value by the extent of_______.
A. Company growth rate
B. Interest rate
C. Depreciation rate
D. Retention rate

20. Return on equity is an example of

A. Economic profit
B. Accounting profit
C. Book profit
D. Pre-tax profit

21. The best measure of liquidity position of a company is________.

A. Gross operating cash flow
B. Book profit
C. Net operating cash flow
D. Gross income

22. Return on capital is calculated based on profit ____________.

A. After paying both tax and interest
B. Before paying both tax and interest
C. After paying tax and before interest
D. After paying interest and before interest

23. A company reported operating income as $50,000 million on capital invested of $100,000
million with effective tax rate of 10%. Estimate the return on capital.
 A. 50%
B. 45%
C. 55%
D. None of the above

24. Suppose Indian’s sovereign CDS spread is 6.52% and that of USA is 2.8%.The ERP of USA
is 4.25%. What are the India’s sovereign CDS spread net of USA and total ERP?
A. 3.72% and 10.77%
B. 9.32% and 2.27%
C. 3.72% and 9.4%
D. 9.32 and 10.77%

25. When default risk spreads and equity risk premiums are highly correlated, one would expect
equity spreads to be
A. Equal to debt spread
B. Higher than debt spread
C. Lower than debt spread
D. Unrelated to debt spread

26. Which of the following expense is not being met before paying to the equity shareholders?
A. Reinvestment needs
B. Tax obligations
C. New debt repayment
D. None of the above

27. Suppose the total capital employed in a company is 100 crore with 40 crore equity, 40 crores
in debt and rest in preferred stock. Cost of equity is 20%, tax rate is 10%, interest rate is 5%,
and preferred dividend is 15%. What will be the WACC?
A. 15.2%
B. 12.8%
C. 11.5%
D. None of the above

40*0.2+(1-0.1)*0.05*40+20*0.15

28. The levered beta is _______ to debt-equity ratio.

A. Positively related
B. Negatively related
C. Unrelated
D. None of the above.

29. The value of the stock is measured by

A. Dividend per share in next period / Cost of equity+ dividend growth rate
B. Dividend per share in next period / Cost of equity-dividend growth rate
C. Dividend per share in next period * dividend growth rate/ Cost of equity
 D. Dividend per share in next period / dividend growth rate/ Cost of equity

30. Gordon growth model is based on which of the following assumption?

A. Dividend growth rate is less than required rate of return for equity investor
B. Dividend growth rate is more than required rate of return for equity investor
C. Dividend growth rate is equal to required rate of return for equity investor
D. None of the above

31. Which of the following is the limitation of Gordon growth model?

A. As the growth rate converges on the discount rate, value goes to zero
B. As the growth rate converges on the discount rate, value becomes negative
C. As the growth rate converges on the discount rate, value goes to infinity
D. As the growth rate converges on the discount rate, value goes to one

32. Consider a stock with an expected dividend per share next period of $13.00; cost of equity is
20% and an expected growth rate of 5% forever. What is the value of the stock?
A. 52.00%
B. 86.67%
C. 3.25%
D. None of the above

33. If the dividend paid in 2016 was $3.25, what is the expected dividend for 2018 if the stable
dividend growth rate is 5%?
A. $3.41
B. $0.16
C. $3.58
D. None of the above

34. The dividend discount model ____________.

A. Ignores capital gains
B. Incorporates the after tax value of capital gains
C. Includes capital gains implicitly
D. Restricts capital gains to its minimum

35. Which of the following summarize the two stage dividend discount model?
A. High growth rate in first stage and declining growth rate in second stage
B. High growth rate in first stage and stable growth rate in second stage
C. Low growth rate in first stage and high growth rate in second stage
D. Stable growth rate in first stage and high growth rate in second stage

36. How does expected growth rate relate to payout ratio?

A. Positively
B. Negatively
C. Unrelated
D. None of the above
37. Which of the following is correct for two stage H model?
A. At the initial phase , the growth rate is constant
B. At the initial phase, the growth rate increases linearly over time
C. At the initial phase, the growth rate decreases linearly over time
D. None of the above

38. Which of the following is true regarding two stage H model for the entire period?
A. Dividend payout ratio is constant but cost of equity is variable
B. Dividend payout ratio and cost of equity both are variable
C. Dividend payout ratio is variable but cost of equity is constant
D. Dividend payout ratio and cost of equity both are constant

39. Which of the following is the unique feature of three stage dividend discount model?
A. Payout ratio is constant throughout the periods.
B. There is no restriction on payout ratio
C. At initial phase, it assumes declining growth rate
D. None of the above

40. Which of the following is implied for a firm in steady state?

A. Capital expenditure is significantly greater than depreciation.
B. Capital expenditure is not significantly greater than depreciation
C. Beta of the stock is greater than one.
D. None of the above

Part-B

1. Zigdeal Ltd. is an ecommerce startup that requires $2,500,000 to expand the business.
The firm’s management has approached the venture capital firm Excel Partners which
has expressed interest in the investment opportunity. Zigdeal’s management made the
following GMV (Gross Merchandise value) forecasts for the firm spanning the next six
years.
Year GMV(‘000$)
1 100
2 100
3 1000
4 2000
5 4500
6 5000
The VC firm believes the firm will sell for an X multiple of GMV in the sixth year of
operations. VC firm Excel Partners wants to arrive at the X multiple of GMV by looking
at comparable ecommerce cos. in the market and their EV/GMV ratio (EV is the
Enterprise value). EV is the sum of Market value of equity and Market value of debt.
The X multiple will be an average multiple of the comparable cos. The Table shows the
 GMV values for comparable cos. and other parameters of the firm. The risk free rate is
3% p.a.
Interest Debt
No. of
Comparable expense outstandin Default Maturity Share GMV
shares
Company ($ million) g in the spread of loan price ($millio
outstandin
name books($ (%) (years) ($/share) n)
(Annual) g (nos.)
million)
Ababa 10 200 2% 10 100 10,00,000 30
Mazon 50 500 3% 15 120 20,00,000 50
Sapdeal 20 120 3% 10 50 30,00,000 30
The firm Zigdeal Ltd. forecasts that firm will have $1.8 million in interest-bearing
market value of debt outstanding at the end of six years and a cash balance of $130,000 at
the end of six years.Given: Holding period for VC firm is 6 years. The deal is structured
using Straight common stock, where investor requires IRR of 55%.
i. What is the average EV/GMV multiple obtained from the comparable cos.
data?@2
ii. Based on the offering terms of deal structure, what fraction of the firm’s
shares will it (Zigdeal Ltd.) have to give up to get the requisite financing?
@2
iii. Based on the offering terms of deal structure, what is the post-money
valuation (in $million) of the company Zigdeal Ltd.?@2

2. Reema a lead fundamental analyst was trying to find the PE (Price to Earnings) ratio for
X Co. based on its’ fundamentals. The company currently retained 40% of earnings to
invest in future growth opportunities. The return on retained earnings was expected to be
12% p.a. The company plans to continue with the same retention ratio for next 3 years
(i.e. time 0, 1, 2 and 3) and the opportunity will return 12% p.a. on retained earnings for
these years.
X Co. would be retaining 20% of the earnings from 4th year onwards and the investment
opportunity would be returning 10% p.a. on the retained earnings. This opportunity
(which returns 10%p.a. and for which company retains 20% of earnings) will exist
indefinitely.
The risk free rate is 4% p.a. and market risk premium is 5.5% p.a. The beta equity for X
Co. is 1.5.
What is the Price to Earnings ratio calculated based on the fundamentals? @3

3. Rural Ladder is an online furniture and home décor company. The company’s marketing
department has come up with the estimate that Rural Ladder can sell 40 units per year if
successful and 10 units per year if unsuccessful (with a probability of success being
50%), at an average value of $100,000 net cash flow per unit, every year till perpetuity.
An initial investment (at time 0) required for this online platform is $10 million. The cost
of capital is 35% for such businesses.
After the first year, if unsuccessful, the company can be sold/ abandoned at an after-tax
value of $15 million at the end of Year1. Also, after the first year, if successful, units sold
 can be revised to 55 units per year due to expansion (selling at an average value of
$120,000 net cash flow per unit) every year till perpetuity with a probability of success
being 50% and 0 units per year if unsuccessful.

What is the NPV range (at time 0, in $million) of this venture, including the value of real
options embedded in this venture?@ 3

4. The Indian bank XYZ reported a return on equity of 25% in 2010 and paid out dividends
per share Rs. 10 that year (on reported EPS 50.75). The bank is expected to maintain its
current position for the next five years, leading to expected growth rate in earnings per
share of 15%. The stable growth is expected to be 5% at post high-growth period. Beta
for XYZ bank is assumed to be 2.3 and 1.2 for the high and stable growth period. Given
risk free rate is 6%, market premium is 5% and additional country risk premium for India
is 2.5%.
i. Find the present value of the dividends per share for each of the next 10
years.@5
ii. Find the present value of the terminal price of the share at the end of the
year 10.@2
iii. Find the value of the XYZ bank stock.@2
iv. Comment on the valuation status of XYZ bank if it was trading at Rs. 500
per share in November 2011?@1
v. What will be the value of the stock at the end of year 11?@1
vi. What will be the impact on value of the bank stock at the end of the year
10 if the beta at stable growth period would be 1?Based on this valuation
comment on the status if the stock is traded for the price mentioned at part
iv of the question?@2