Equity Valuation Cases
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Transcript of Equity Valuation Cases
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IIFT
EQUITY VALUTION
CASES FOR DISCUSSION
1. Case 1 : Forecasting the Financial StatementsThe following data pertains to Maruti Suzuki Ltd. Based on the Assumptions given below,
prepare the forecasted financial statements of Maruti Suzuki Ltd. for the year 2010.
CONSOLIDATED BALANCE SHEETFOR THE YEAR ENDEDMARCH 31, 20XX Rupees inMillion
2008Actual
2009Actual
2010forecast
Assumptions
SOURCES OF FUNDSSOURCES OF FUNDSSOURCES OF FUNDSSOURCES OF FUNDS
SHAREHOLDERS' FUNDS
Capital 1,445 1,445 No change
Reserves and Surplus 84,826 94,208Add Retained earnings and do any
other adjustments if needed
et worth 86,271 95,653MINORITY INTEREST 0 0 Nil
LOAN FUNDS
Short term borrowings 126 119 Plug figure
Long term borrowings 9,269 7,469No growth, repayment of 2009 in 5
equal installments
Total loan funds 9,395 7,588
DEFERRED TAX LIABILITIES 1744 1598 10% growth
Total Liabilities 97,410 104,839
APPLICATION OF FUNDSAPPLICATION OF FUNDSAPPLICATION OF FUNDSAPPLICATION OF FUNDS
FIXED ASSETS
Gross Block 73,561 89,041 5% growth in Capex each year
Less: AccumulatedDepreciation -40,168 -46,878
Previous years balance and incomestatement figure
et Block 33,393 42,163
Capital Work-In-Progress 7,746 8,674 7000 in the next two yearsTotal Fixed Assets 41,139 50,837
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INVESTMENTS 52,649 32,772
Long term investments 3,580 4,205 20% growth each year
Short term investments 49,069 28,567 Plug figure
CURRENT ASSETS, LOANSAND ADVANCES
Inventories 10,483 9,213 Inventory Days = 20
Sundry Debtors 6,798 9,599 Debtors Days = 13
Cash and Bank Balances 3,901 19,868 Min. cash balance 5% of sales
Other Current Assets 338 988 5% of sales
Loans and Advances 10,569 16,548 8% of salesTotal Current Assets 32,089 56,216
LESS: CURRENT LIABILITIESAND PROVISIONS
Current Liabilities 25,037 31,431 Creditors Days = 50
Provisions 3,430 3,555 2% of salesTotal Current Liabilities 28,467 34,986
Net Current Assets 3,622 21,230Total current Assets less Total
Current Liabilities
Total 97,410 104,839
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PROFIT & LOSS ACCOUNTFOR THE YEAR ENDEDMARCH 31, 20XX
2008Actual
2009Actual
2010Forecast
Assumptions
Rupees in Million
Net Sales 180,208 205,579 10% growth
Income from Services 833 1,059 15% growth
Other Income(Interest, Dividend, Profit onsale of investments, basicallyinvestment income 9363 11173
5% of the long term and short termInvestments
Total Revenue 190,404 217,811
COST OF GOODS SOLD 158,580 193,047 90% of sales
EBIDTA 31,824 24,764
Interest Expense 625 545 5% on average borrowings
Depreciation 5,727 7,165 7% of average Net Fixed Assets
Profit before Tax 25,472 17,054
Less : Current Tax 7,746 4,754 30% of PBT
- Deferred Tax 32 -114 Nil
- Fringe Benefit Tax 100 97 Nil
Profit after Tax 17,594 12,317
Share of profit in Investmentin Associates 305 -43
5% of Long term investments
et profit after tax andincome from investment inassociates 17,899 12,274
Less: Appropriations
Proposed Dividend 1,445 1,011 8% of profit for the year (PAT)
Corporate Dividend Tax 248 172 17% of proposed dividend
Retained Earnings 16,206 11,091
o. of equity sharesoutstanding 289 289 Same, No change
Basic Earnings Per Share (inRupees) 60.90 42.63
Profit for the year / No. of equityshares outstanding
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2. Case 2 Cash Flow CalculationFrom the Calculations done in the Example no. 1, draw the Cashflows of Maruti Suzuki Ltd.
CASHFLOWS CALCULATION
2009 Actual 2010 forecast
Operating Cashflows
Net Income
Add: Depreciation and amortisation
Deferred Income Tax
Working Capital changes
(inc)/dec in Inventories
(inc)/dec in Debtors
(inc)/dec in Other Current Assets
(inc)/dec in Loans and Advances
inc/(dec) in Current Liabilities
inc/(dec) in Provisions
(Inc.) in Working Capital
Cash from Operations
Capital Expenditure
Disposal of Assets
(inc)/dec in Net block
(inc)/dec in Capital WIP
(inc)/dec in Investments
Cash from Investing activities
Inc. / (Dec.) in Short term borrowings
Inc. / (Dec.) in Long term borrowings
Dividends & Div. tax
Inc. / (Dec.) in Reserves and Surplus
Inc. / (Dec.) in Deferred Tax Liabilities, Net
Cash from financing activities
Cash & Bank Balances -Beginning
Change in Cash & Bank Balances
Cash & Bank Balances - Ending
Cash & Bank Balances - as per Bal. Sheet
Diff. between cash balance (expected andbalance sheet)
Short term investments
Parity Check
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3. Case 3 Free Cash Flow CalculationsUse the information in the Example 1 and 2 and find out
1. Free Cash flow to Firm2009
Actual 2010 forecast
Earnings before Interest and Taxes
Add:
Depreciation and Amortization
any other Non Cash Charges
Less: Working Capital Charges
Less: Capital Expenditure
Free Cash flow to Firm
2. Free Cash flow to Equity
2009Actual 2010 forecast
Free Cash flow to Firm
Less: Interest exp. (1-t)
Add:
Issue of New Equity
Issue of Preference Shares
New Borrowings
Less:
Buy Back of Equity
Redemption of Preference Shares
Repayment of Debt
Interest Expense
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4. Case 4 - Free Cash Flow CalculationsBased on the following information, calculate
a. Free Cash flow to Firm
b. Free Cash flow to Equity
Using different approaches of calculations.
Income Statement Millions (Rs. )Statement of CashFlows Millions (Rs. )
Revenue 4,000 Net Income 492
Operating Expenses -2,700 Depreciation 400EBITDA 1,300 WC adj.
Depreciation -400 A/R -40
EBIT 900 Inventories -30
Interest Expense -80 A/P 15
EBT 820 Accrued Taxes 10
Taxes @ 40% 328Cash Flow fromOperations (CFO) 847
Net Income 492 Investing Activities:Purchase of fixedassets -400
Financing Activities:
Notes payable 50
Long-term financingissuances 25
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Free Cash Flow to Firm Free Cash Flow to Equity
1 Net Income 1 Net Income
Add: Non Cash Charges Add: Non Cash Charges
Interest (1-t)Less: Capital ExpenditureInvestment
Less: Capital ExpenditureInvestment
Investment in WorkingCapital
Investment inWorking Capital A/R
A/R Inventories
Inventories A/P
A/P Add: Net Borrowing
Notes payable
Long-term financing issuances
2Cash Flow Fromoperations
Add: Interest (1-t) 2 Free Cash Flow to Firm
Less: Capital Expenditure
Investment Less: Interest (1-t)Add: Net Borrowing
Notes payable
Long-term financing issuances
3 Cash Flow From operations
Less: Capital ExpenditureInvestment
Add: Net Borrowing
Notes payable
Long-term financing issuances
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Discounted Cash flow Calculations
5. Based on the following information, calculate the value of the firmEBIT Rs. 5200
Depreciation Rs. 2300
Capital Spending Rs. 3300
Working Capital Additions Rs. 303
Tax Rate 40%
Assumed Constant Growth Ratein Free Cash Flow 5%
Weighted-average Cost ofCapital
11%
6. Single Stage FCFF ModelThe Rambo Company is currently having Rs. 600,000. They are currently operating at
their target debt ratio of 30%. The market value of the firm's debt is Rs. 3,530,000 and
Rambo has 500,000 shares of common stock outstanding. The firm's tax rate is 40%, the
shareholders require a return of 14% on their investment, the firm's cost of debt is 9%,
and the expected growth rate in FCFF is 6%. Calculate the value of the firm.
7. Two stage FCFF modelFollowing data of FCFF per share for the next 6 years and at the initial phase is given by
Stone and Company.
Year 0 1 2 3 4 5 6
Rs. 13.45 15.90 17.34 17.13 17.67 18.34 19.99
Presently the companys WACC (weighted Average Cost of Capital) is 18% for the first 5
years. After that it is expected that the WACC will fall down to 14%. After the 6 th year,the growth rate will be closer to the economic growth of approx 6%. The firm has 1
million shares of common stock outstanding and its long term debt is trading at its par
value of Rs. 30 million. Find out the Value of the Firm.
8. An Analyst is following a dotcom company for the buy side recommendation to be doneon behalf of a venture capitalist. It is expected that the company with perform in a high
growth phase for the next 4 years having the FCFE of Rs. 3.00, Rs. 5.25, Rs. 5.55, Rs. 7.00
respectively for each year. After the 4th year the growth rate is expected to slow down
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@3%. The firm is assumed to pay no dividends in the near
future. Further, for high growth phase and the stable growth phase, following
assumptions are made by the analyst.
High-growth period assumptions:
The companys target debt ratio is 40% and a beta of 1.24
The expected equity risk premium is 6% and the long-term Treasury Bond Rate
is 4.0%.
Stable-growth period assumptions:
The companys target debt ratio is 40% and a beta of 1.0.
The expected equity risk premium is 6% and the long-term Treasury Bond Rate
is 4.0%
Capital expenditures are assumed to equal depreciation
In the fifth year, the EPS will be Rs. 9.00 and further working capital will be
needed Rs. 3 per share
Earnings and working capital are expected to grow by 3% a year in the future.
9. The following are the projected cash flows to equity and to the firm over the next fiveyears: (use the data for next two questions)
(The terminal value is the value of the equity or firm at the end of year 3.)The firm has a cost of equity of 12% and a cost of capital of 9.94%.
a. What is the value of the equity in this firm?
i. Rs. 3454.36ii. Rs. 3437.71
iii. Rs. 3367.58iv. Rs. 3425.23
b. What is the value of the firm?
i. Rs. 5401.99
ii. Rs. 4258.25
iii. Rs. 5869.56
iv. Rs. 7458.12
Year CF to Equity Int (1-t) CF to Firm
1 Rs. 250.00 Rs. 90.00 Rs. 340.00
2 Rs. 262.50 Rs. 94.50 Rs. 357.00
3 Rs. 275.63 Rs. 99.23 Rs. 374.85
TerminalValue Rs. 3,946.50 Rs. 6,000.00
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10.WACC CalculationMicky and Co. has 125.12 million shares traded at a market value of Rs. 32 per share,
and Rs. 112.23 million in book value of outstanding debt (with an estimated market
value of Rs. 198 million). The equity has a book value of Rs. 557 million, and the stock
has a beta of 1.23. The firm paid interest expenses of Rs. 1.55 million in the most recent
financial year. Applicable tax rate of the firm is 35%. The firm is being rated as AAA.
The 30 year government bond rate is 6.25%, and AAA bonds trade at a spread of twenty
basis points (0.2%) over the treasury bond rate.
11.In the followingcase, which discount rate should be used as a discounting rate forvaluation?
Cost ofequity
Cost of debt
Infoacqua (Acquirer) 13.00% 10.50%
Telechamp (target) 16.50% 12.50%
12.Discuss which valuation model is most appropriate in following cases? DiscountedCash Flow Valuation or Relative Valuation?
a. When the investor has a long time horizon
b. When the investor has a short time horizonc. When the investor is an activist investor or a potential acquirer of the whole firm are
capable of providing the catalyst needed to move price to value
d. When the investor is an activist investor or a potential acquirer of the whole firm
e. The company has a history that can be used in estimating future cash flows.
f. The investors are judged based upon a relative benchmark (the market, other
portfolio managers following the same investment style etc.)
g. Can take actions that can take advantage of the relative mispricing; for instance, a
hedge fund can buy the under valued and sell the over valued assets
h. When you are valuing a commodity
i. When you are trying to find out the value of a stock to be decided for an IPOj. You are a portfolio manager and you get judged based on how much money you
earned or lost compared to other portfolio managers
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Relative Valuation
13. Dividend pay out ratio = 40%Required Rate of Return by the shareholders = 16%
Expected growth rates in dividends = 6%
Calculate the P/E multiple on the basis of above information.
14. Retention Ratio = 55%Required Rate of Return by the shareholders = 16%
Find out P/E ratio.
15.
Return on Equity = 13%Required Rate of Return by the shareholders = 16%
Expected growth rates in dividends = 8%
Calculate the P/B multiple.[Hint: P/B = (ROE g) / (r g)]
16. Revenue Per Share =Rs. 350EPS = Rs. 4.50
Dividend payout ratio = 60%
ROE=20%
Required rate of return = 13%Calculate P/Sales ratio[hint: P/S = [profit margin payout ratio (1 + g)] / (r g)]
17. Dividend payout ratio = 55%Beta = 0.89
Expected growth rate in earnings = 7%
Regression result = Predicted price to earnings (P/E) = 7.65 + (3.75 dividend payout) +
(15.35 growth) (0.70 beta)
Find out the P/E multiple
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Residual Income
18. Indian Tower company builds the tower for the telecom infrastructure. The bookvalue of its assets is Rs. 1.4 billion, which is financed with Rs. 800 million in equityand Rs. 600 million in debt. Its before-tax cost of debt is 3.33%, and its relevant tax
rate is 34%. The cost of equity is of 12.3%.
EBIT Rs. 142,000,000
Less: interest expense (20,000,000)
Pre-tax income 122,000,000
Less: income tax expense (41,480,000)
Net income Rs. 80,520,000
What is the residual income for Indian Tower Company?