Business Valuation Question 1 ‘The balance sheet of HK Ltd. 1s as follows: 7000 ‘Non-Current Assets 1,000 Current Assets Trade Receivables 500 Cash and cash equivalents 500 2,000 Shareholders’ funds 800 Long Term Debt 200 Current Liabilities and Provisions 1,000 2,000 ‘The shares are actively traded and Current Market Price is £12 per share. Shareholder funds represent 70,000 shares of € 10 each and rest is retained earnings, Calculate the Enterprise Value of HK Ltd. Answer Shares outstanding 70,000 Current Market Price (CMP) Tz Market Capitalization 78,40,000 Add: Debt 3 2,00,000 Lass: Cash & Cash equivalents @5,00,000) Enterprise Value (EV) 35,40,000 Question 2 Snake Ltd. is taking over Lizard Ltd, both are listed companies. The PE Ratio of Lizard Ltd.has been low as 4 and high as 7 and is currently 5. Lizard Ltd’s previous year BPS was % 3.40 and current expected EPS this year to be % 4.00. Determine the different range of values of shares using P/E Ratio Model Answer ‘The range of values using P/E Ratio and EPS either historic or projected are as follawe: SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation EPS Value Value of Shares Historic + 13.60 Historic 17.00 23.80 Expected Expected 28.00 Question 3 Sun Ltd. recently made a profit of t 200 crore and paid out % 80 crore (slightly higher than the average paid in the industry to which it pertains), The average PE ratio of this industry is 9, The estimated beta of Sun Ltd. is 1.2. As per Balance Sheet of Sun Ltd, the shareholder's fund is € 450 crore and number of shares is 10 crore. In case the company is liquidated, building would fetch £200 crore more than book value and stock would realize 50 crore less. ‘The other data for the industry is as folow Projected Dividend Growth 4% Risk Free Rate of Return 6% Market Rate of Return 11% Calaulate the valuation of Sun Ltd. using (@_P/ERatio (0) Dividend Growth Model (9 Book Value (a) Net Realizable Value Note: Present calculations in Z crore Answer (a) £200 corex 9= 1800 core (b) Ke=6%+ 12 (11% - 6%) = 12% 80 worex 104 Value of Sun Led, = SEO = ©1040 crore (c) €450 crore (d)_ £450 crore + % 200 crore -50 crore = 3 600 crore Question 4 ICL is proposing to take over SVL with an objective to diversify. ICL’s profit after tax (PAT) it grown @ 16% pa. and SVL's PATis grown @ 15% pa, Both the companies pay dividend regularly. SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation ‘The summarised Profit & Loss Account of both the companies are as fellows: Zin Crores Particulars ICL SVL Net Sales 4545 1,500 PBIT 2,980 720 Interest 780 25 Provision for Tax 1.440 445 PAT 790 250 Dividends (Ds) 235 2s ‘The summarised Balance Sheet of both the companies are as follows: in Crores Particulars ICL SVL Fixed Assets Land & Building (Net) 720 190 Plant & Machinery (Net) 900 350 Furniture & Fixtures (Net) 30 1,650 10 550 Current Assets 775 580 Less: Current Liabilities Creditors 230 130 Overdraft 35 10 Provision for Tax 145 50 Provision for dividends 60 470 50, 240 Paid up Share Capital (% 10 per share) Reserves and Surplus Borrowing Capital Employed Additional information: ICL ‘SVL Market Price Share (8) 52. 75 ICL’s Land & Buildings are stated at current prices. SVL’s Land & Buildings are revalued three years ago. ‘There has been an increase of 30% per year in the value of Land & Buildings. ICL’s Management wants to determine the premium (%) on the shares over the current market price which can be paid on the acquisition of SVL. Youare required to determine the premium using: (@ Net Worth (Net Asset Value) adjusted for the current value of Land & Buildings plus estimated average profit after tax (PAT) for the next five years. SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation (i) The dividend growth formula (assuming SVL is expocted to grow @ 18% each year after merger) Gi) ICLwill push forward which method during the course of negotiations? Note: Present calculations in t crores and round off upto 2 decimals. Period (t) 1 2 3 + 5 FVIF (30%, 1) 1.300 1690 2197 2.856 3713 FVAF (159%, t) 145 2.4725 3.9938 5.7424 7.1837 Answer (i) Computation of Premium (Net Worth Formula): Amount (tin Crores) ‘Total Assets (Fixed assets + Current Assets) = (550+ €580) 1,130) Less: Liabilities (Current Liabilities + Borrowings) - (3240 + 105) 345, Not Asset Value 785) Current Value of Land after growing for three years @ 30% = 190 x 2.197 41743, Less: Book Value 190.00 Increase in the Value of land 227.48 Adjusted Net Asset Value (& 785 + % 227.43) 1,012.43 Current Profit after Tax @ 15 % for 5 years ie. 250% 7.7537 1,938.43 Average Profit for 1 year =f 1,938.43/5 years 387.69 Total Value of Equity (¥ 1,012.43 + T 387.69) 1,400.12 ‘Total Market Value = No. of shares x MPS = 12.50 crorex 75 93750 Premium (Total Value — Market Value) 46152 Premium (9) = FE 462.62/% 937.50] x 100 49.35% (i) Computation of Premium (Dividend Growth Formula): Existing Growth Rate 0S DPS = % 125 crores/12.50 crore shares 10 MPS U5 Cost of Equity [(D1/MP) + a] = [(€ 10x 1.15/75) + 0.15] 03033, Expected growth rate after merger 0.18 Expected Market Price [(€ 10x 1.18)/(03033 - 0.18)] T9570 Premium over current market price [(% 95.70 -% 75)/%75] x 100 27.60% (iii) During the course of negotiations, ICL will push forward valuation based on Dividend Growth Method as it will lead ta least cash outflow. Question 5 Eagle Ltd. rep orted a profit of & 77 lakhs after 30% tax for the financial year 202.425. An analysis of the SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation accounts revealed that the income induded extraordinary items of % 8 lakhs and an extraordinary loss of € 10 lakhs, The existing operations, except for the extraordinary items, are expected to continue in the future, In addition, the results ofthe launch of anew product are expected to be as follows: in lakhs Sales. 70 Material costs 20 Labour costs 12 Fixed costs 10 ‘You are required to: (@ Calaulate 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 at 13% preference shares of t 100 each and 50,00,000 equity shares of € 10 each and the P/Bratio being 10 times. Note: Present calculations in T lakh Answer (Computation of Business Value Lakhs Lakhs Profit before tax [77/(1 -0.30)] 110 Less: Extraordinary income ® Add: Extraordinary losses 10 1i2 Profit from new product Sales 70 Less: Material costs 20 Labour costs iz Fixed costs 40 aa 28 140.00 Less: Taxes @ 30% 42.00 Future Maintain able Profit after taxes 98.00 Relevant Capitalisation Factor O14 Value of Business (%9B/ 0.14) (i) Determination of Market Price of Equity Share Future maintainable profits (After Tax) % 98,00,000 Less: Preference share dividends 1,00,000 shares of 100 @ 13% 3 13,00,000 Earnin gs available for Equity Shareholders 3 85,00,000 BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation No, of Equity Shares '50,00,000 Earnings per share (% 85,00,000/50,00,000) TL70 PEratio Market price per share 10 uy Question 6 H Ltd, agrees to buy over the business of B Ltd, effective 1 April, 2025, The summarized Balance Sheets of H Ltd. and B Ltd.as on 31 March, 2025 are as follows: Balance sheet as at 31% March, 2025, (in Crores of Rupees) Particulars Ltd, Bid. Liabilities Paid up Share Capital Equity Shares of £100 each 350.00 - Equity Shares of £10 each - 650 Reserve & Surplus 950.00 25.00 Total 1,300.00 31.50 ‘Assets Net Fixed Assets 20.00 0.50 Net Current Assets 1,020.00 29,00 Deferred Tax Assets 60.00 2.00 Total 1,300.00 31.50 H Ltd, proposes to buy out B Ltd. and the following information is provided to you as part of the scheme of buying: (1) The weighted average post tax maintainable profits of H Ltd. and B Ltd. for the last 4years are 300 crores and ¥ 10 crores respectively. (2) Both the companies envisage a capitalization rate of 8%, (3) H Ltd. has a contingent liability of % 300 crores as on 314 March, 2025. (4) H_Lte. to issue shares of € 100 each to the shareholders of B Ltd. in terms of the exchange ratio as arrived on a Pair Value basis. (Please consider weights of 1 and 3 for the value of shares arrived on Net Asset basis and Earnings capitalization method respectively for both H Ltd. and B Lud.) ‘You are required to arrive at the value per share of both H Ltd. and B Ltd. under: (@ — NetAsset Value Method (i) Earnings Capitalisation Method (iii) Exchange ratio of shares of H Ltd. to be issued to the shareholders of B Ltd. on a Fair value basis (taking into consideration the assumption mentioned in point 4 above) Note: Present calculations in crore BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Answer () Netasset value 41.300 Crores = 300 Crores HLta. = E2851 3.50 Crores LaLs0 crores = Bua. 0.65 Crores = 4846 Note: Ithas bes assumed that the contin gent Hability will materialize at its full amount. (i) Earning capitalization value 4300 Crores/ 0.08 _ Hid. Sag RomslO08 407448 Si0Gors/008 Bld. 0.65 Crores = 719231 (iii) Fair value S2GSix SOEs ita 4 =3075 24846x1+319231x3 BkLead. = = 71563475 Exchange ratio essed = 0.1787 2875 H Ltd should issue its 0.1787 share for each share of B Ltd. Cash Flow Based Models Question 7 Following information are available in respect of XYZ Led. which is expected to grow at a higher rate for 4years after which grawth rate will stabilize at a lower level: Base year information: Revenue %2,000 crores EBIT 300 crores Capital expenditure 280 cores Depreciation 1200 crores Information for high growth and stable growth period are as follows: High Growth Stable Growth Growth in Revenue & EBIT 20% 10% Growth in capital expenditure and deprectation 20% Capital expenditure are offset by deprecation BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Risk free rate 10% 9% Equity beta 115 1 Marketrisk premium 6% 5% Pretax cost of debt 13% 12.86% Debt equityratio at 23 For all time, working capital is 25% of revenue and corporate tax rate is 30%. ‘What is the value of the firm? Note: Present all calculations in % crore Answer High growth phase: Kg = 0.10 + 1.15 x 0.06 = 0.169 or 16.9% ky = 0.13 x (1-03) = 0.091 oF 9.1% Cost of capital = 0.5 x 0.169+ 0.5% 0.091 = 0.13 or 13% Stable growth phase: ke = 0.09 + 100.05 = 0.13 0r 14% = 0.1286 x (1 - 0.3) = 0.09 or 9% Cost of capital = 0.6 x 0.14+ 0.4x 0.09 = 012 ar 12% Determination of forecasted Free Cash Flow of the Firm (FCFF) (%in crores) Year 1 Year 2 Year 3 Year4 | Terminal Year Revenue 2,400 2,880 3,456 4197.20 4561.92 EBIT 360 #32 518.40 622.08 684.29 NOPAT 282 302.40 362.88 435.46 479.00 Capital Exp. - Dep. C4) (415.20) | (438.24) | (165.99) - 4 Working Capital C100.) | (420.00) | 4400) | 72.80) (103.68) 56.00 67.20 BOGE 96.77 37532 Present Value (PV) of FCFF during the explicit forecast period is: FCEF (in crores) PVF @ 13% PV (tin crores) 56.00 0.885 4956 61.20 0783 52.62 80.64 0.693 sS.8e 96.17 0613 5932 321738 ‘Terminal Value of Cash Flow = pee 318,766.00 Crores SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation PV of the terminal value is: = 18,766.00 Crores ‘cH £ 18,766.00 Crore x 0.613 = € 1150356 Crore The value of the frm fs: = £217.38 crore + € 11,503.56 crore = 11,720.94 crore Question 8 Following information is given in respect of WXY Ltd., which is expe cted to grow at a rate of 20% pa. for the next three years, alter which the growth rate will stabilize at 8% p.a.normal level, in perpetuity. For the year ended March31,2025 Revenues 7,500 Crores Gost of Goods Sold (COGS) 3,000 Crores Operating Expenses 2,250 Crores Capital Expenditure 750 Crores Depreciation (included in Op erating Expenses) 600 Crores During high growth period, Revenues & Earnings before Interest & Tax (EBIT) wall grow at 20% pa. and capital expenditure net of depreciation will grow at 15% p.a. From year 4 onwards, iz, normal growth period, Revenues and EBIT will grow at 8% p.a. and incremental capital expenditure will be offset by the depreciation. During both high growth & normal growth period, net working capital requirement wil be 25% of revenues, ‘The Weighted Average Cost of Capital (WACC) of WXY Ltd. is 15%. Corporate Income Tax rate will be 30%. Estimate the value of WXY Ltd. using Free Cash Flows to Firm (RCFF) & WACC methodology. ‘The PVIF@ 15 % for the three years are as below: Year tl t te PVIF 0.8696 0.7561 06575 Note: Present all calculations in & crore Answer Determination of forecasted Free Cash Flow of the Firm (FCF) (Zin crores) Year 1 Year2 Year3 _| Terminal Year Revenue 9,000.00 10,800.00 12,960.00 13,996.80 cogs (3600.00) | (4320.00) | (5,184.00) 59872) Operating Expenses exd.Dep. | (1,980.00) | (2,376.00) | (2,851.20) @.07930) Depreciation (720.00) (864.00) (4,036.80) (11974) EBIT 2,700.00 3,240.00 3,888.00 4,199.04 SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Tax @ 30% (810.00) (972.00) Gy166.40) | 25971) NoPAT 1,890.00 2,266.00 2721.60 2,939.33 Capital Exp. - Dep. (172.50) (198.38) 28.13) - ‘A Working Capital (375.00) (450.00) 640.00) (259.20) Free Cash Flow (ECE) 1,342.50 1,619.62 1,953.47 2,680.13 Present Value (PV) of FCFF during the explicit forecast period is: FCFF (in crores) PVF @ 15% PV (Zin crores) 1342.50 0.8696 1,167.44 1,619.62 0.7561 1.22459 1,953.47 0.6575 1,284.41 3,676.44 PV of the terminal value is: 2,680.13, 1 015-008 * 15)" ‘The value of the firm is: £5,67644 Crores + 25,1708 Crore % 28,850.52 Crores Question 9 = 38,287.57 Crore x 0.6575 = % 25,174.08 Crore BRS Inc deals in computer and IT hardware and peripherals. The expected revenue for the next 8 years is as follows: ‘Years Sales Revenue (% Million) 1 ey anean 8 10 15 22 30 26 23 20 Summarized finan ial position relating to the year which has just ended was as follows: Liabilities ‘Amount (% Million) Assets ‘Amount (% Million) Equity Stocks 2 Fixed Assets (Net) v 12% Bonds 8 Current Assets 3 20 20 BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Additional information: (@) _ kts variable expenses is 40% of sales revenue and fixed operating expenses (cash) are estimated. ‘to be as follows: Period Amount (¥ Million) 1ayears 16 5-8 years 2 (®) An additional advertisement and sales promotion campaign shall be launched requiring expenditure as per following details: Period ‘Amount (3 Million) ‘year 050 2-3years 150 AGyears 3.00 7-Byears 1.00 (©) Fixed assets are subject to depreciation at 15% as per WDV method. @) The company has planned ad coming 8 years as follows: ional capital expenditures (in the beginning of each year) for the Period Amount (% Million) 1 0.50) 0.80 2.00 2.80 3.50 2.50 150 1.00 eta nee (©) Working Capital requirement is estimated to be 20% of Revenue. (O Applicable tax rate for the company's 30%. (@ Cost of Equity is estimated to be 16.07%. (i) The Free Cash Flow of the firmis expected to grow at 5% per annum after 8 years. With above information you are require to determine the: (Value of Firm (i) Value of Equity Note: Present calculations in € million and round off upto 2 decimal points, ‘Year 1 2 3 + 5 6 7 8 pyvF@i3% | oss [ o7e3 | 0693 | 0613 | 0543 | 0490 | 0.425 | 0376 ————_—_—_—_—_—_—————— BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Answer Working Notes: (@)__ Determination of Weighted Average Cost of Capital Sources of funds Gost (6) Proportions | Weights | Weighted Cost (4%) Equity Stock 16.07 12/20 0.60) 9.64 12% Bonds 12% (1-0.30)= 8.40] 8/20 0.40 336 13 () Schedule of Depreciation Year | Opening Fixed Assets | Addition during the year Total 1 17.00 050) 1487 080 1332 2.00 13.02 250 13.19 350 14.19 250 1419 150 evan e un 13.34 1.00 17.50 18.67 1832 15.S2 16.69 16.69 15.69 (© Determination of Chan ge in Working Capital 3 Million Year | WC (Current Assets) Requirement [20% of Revenue] | Increase/(Decrease) in WC 0 3.00 (given) 1 160 (1.40) 2 2.00 0.40 3 3.00 1.00 4 440 140 5 6.00 1.60 6 520 (0.80) 7 460 (0.60) g 400 (0.60) (@) Determination of Present Value of Cash Inflows Million Particulars ‘Years 1 2 3 4 5 6 7 8 Revenue 00 | 1000 | 15.00 | 22.00 Variable Costs (3.20) | (4.00) | (6.00) | (880) |¢ Fixed operating enst | (1.60) | (1.60) | (1.60) | (1.60) 3000 | 2600 | 23.00 | 2000 12.00) | (10.40) | (2.20) | (8.00) e@oq | 2.00 | @.09) | @.00) BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Advertisement Cost | (0.50) | (1.50) | (1.50) | (3.00) | @.00) | (3.00) | (1.00) | (1.00) Depreciation Gs | 235) | 230) | 235) | 250 | (250) | 235) | 215) BBIT 007 | oss | 360 | 627 | 1050] s1o | 645 | 68s Taxes @ 30% (0.02) | (0.16) | (1.08) | C88) | G15) | (2.43) | @53) | @08) NOPAT S92 ] 479 Depreciation 235 | 215 Capital Expenditure (250) | G00) Change in WE 060 | 0.60 Free Cash Flow 737 | 654 PVE @ 13% 0.225 | 0376 PV 3.3 | 2.46 Total present value =< 18.65 million (©) Determination of Present Value of Continuing Value (CV) FCFR, _ %654 million (1.05) %6.87 “k-g 0.13 - 0.05, “008 Present Value of Continuing Value (CV) = 785.88 million 85.88 million x PVF (13%, 8) 85.88 million x 0.376 = 7 32.29 million (Value of Firm TMillion Present Value of cash flow during explicit pertod 16.65 Present Value of Continuing Value 32.29 Total Value 50.94 (i) Value of Equity Million Total Value of Firm 50.94 Less: Value of Debt 6.00 Value of Equity 42.94 Question 10 Mr. X a financial analyst, intends to value the business of POR Ltd. in terms of the future cash generating capacity. He has projected the following after tax cash flows: ‘Year: 1 2 3 4 5S Cash flows (Tin lakh) 1,760 480 640 860 4,170 ‘The Terminal Value of perpetual cish low is estimated to be 92,340 lakh at the end of the Sttyear, SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Required: (What fs the value of the firm in terms of expected future cash flows, if the cost of capital of the firm is 20%. Gi) The firm has outstanding debts of £3,620 lakh. Calculate the shareholder value per share if the number of outstanding shares is 151.50 lakh. (iii) The firm has received a takeover bid from XYZltd. of % 225 per share. Is it a good offer? [Given: PVIF at 20% for Year 1 to Year 5: 0.835, 0.694, 0.579, 0482, 0.402] Note: Presentall calculations in % lakh Answer (@) Value of Firm Year Cash Flow (in lakhs) PVF PV (Zin lakhs) 1 1,760 0.833 1,466.08 2 480 0.694 333.12 3 640 0579 37056 4 860 0.482 41452 5 1,170 0.402 47034 PV of Cath flows upto year 5 3,054.62 Now, PV of Terminal Value = % 92,340 x 0,402 = € 37,120.68 Lakhs So, Present Value of the firm = % 3,054.62 + & 37,120.68 = % 40,175.30 Lakhs (i) Value per share (Walue of Firm - Value of Debt)/No of shares (40,175.30 - 3,620)/15150 = 241.29 (iii) Takeover bid of t 225 per share seems ta he nota good offer as itis lesser than the intrinsicvalue i.e. value per share of ¥ 241.29. Question 11 The valuation of Hansel Limited has been done by an investment analyst. Based on an expected free cash flow of S¢ lakhs for the following year and an expected growth rate of 9%, the analyst has estimated the value of Hansel Limited to be % 1,800 lakhs. However, he committed a mistake of using the book values of debt and equity. ‘The book value weights employed by the analyst are notknowm, but you know that Hansel Limited has a cost of equiity of 20% and post tax cost of debt of 10%. ‘The market value of equity is thrice its book value, whereas the market value of its debt is ni of its book value. What is the correct value of Hansel Ltd? Note: Present calculations in @lakh -tenths Answer SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Cost of capital by applying Free Cash Flow to Firm (FCFF) Model is as follows: Value of Firm = Vox POPE ‘Where CFF, = Expected FCEFin the year 1 K,= Cost of capital gx= Growth rate forever <54lakhs KB Since g = 9%, then Ky = 12% Thus, € 1,800 lakh: Now, let ‘x’ be the weight of debt and given cost of equity = 20% and cost of debt = 10%, then 20% (1- x) + 10% x = 12% Hence, x= 0.80, s0 book value weight for debt was 80% Correct weight should be 60 of equity an d 72 of debt. Correct cost of capital (Ke) = 20% (60/132) + 10% (72/132) = 145.4% And correct firm's value = ws 2974.73 lakhs Question 12 Calaulate the value of share from the following information relating to the year which has just ended: Profit after tax of the company %290 crores Equity share capital of company 1,300 cores Par value of share 40 cach Debt ratio of company [Debt/(Debt + Equity] 27% Longrun growth rate of the company B% Beta of Equity Ot Risk free interest rate 87% Market return 10.3% Capital expenditure per share 247 Depreciation per share 239 Change (Increase) in Working capital per share 33.85 Note: Calculations to be done in 4 decimals and round off value of share upto 2 decimals. Answer _ £1300 cores _ No, of hares = >ECSISE - 32.5 crores SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation eps = —PAT No. of shares 1290 crores BPS = Fe coron 7 € 8.9231 9231 - [(L- 0.27) (47 - 39) + (1-027) 3.49) 9231 - [84+ 25185] = 0.5646 Cost of Equity = Ret (Ru -Ra = 87+0.1(103 - 8.7) = 8.86% FCFE(1+g) 0.5646 (1.08) . “Rng 00886-0098 0.0086~ Po: Question 13 ABC Company is considering acquisition of XYZ Ltd. which has 15 crores shares outstanding and issued. The market price per share is T 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 in Crore 1 250 2 300 3 400 Caloulate the range of valuation (Value of equity per share and in total from the given methods) that ABC hasto consider. (PV factors at 12% for years 1 to 3 respectively: 0.893, 0.797 and 0.712). Note: Present calculations in Z crore Answer Valuation Based on Market Price Market Price per share = % 400 ‘Thus, value oftotal equity is (% 400 x 1.5 crore) = € 600 Crore Valuation Based on Discounted Cash Flow PV of cash flows = % 250 crore x 0.893 + 300 crore x 0.797 + % 400 crore x 0.712 = 2747.15 Crore Value of per share (747.15 crore/15 crore) = % 498.10 per share Range of Valuation PorShare (2) Total (% Crore) Minimum 400.00 600.00 Maximum 498.10 7474S SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Question 14 AB Led, is planning to acquire and absorb the running business of XV Ltd, The valuation is to be based on the recommendation of merchant bankers and the consid eration is to be discharged in the form of equity shares to be issued by AB Ltd. As on 3132025, 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 t 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 313.25, XY Ltd’s Balance Sheot as at 31.3.2025 is summarised below: Tlakhs Sources Share Capital 20lakhs equity shares of & 10 each fully paid 200 10 lakhs equity shares of & 10 each, 5 paid so Loans Uses Fixed Assets (Net) 150 Net Current Assets ‘An independent firm of morchant bankers engaged for the negotiation, have produced the following estimates of cash flows from the business of XY Ltd.: ‘Year ended By way of akhs 31326 after tax earnings For equity 105 313.27 Do 320 313.28 Do 28 313.29 Do 120 313.30 Do 100 ‘Terminal value estimate 200 It is the recommendation of the merchant banker that the equity 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 year: ara 0.68 You are required to: (@_— Calaulate the total value of the equity of XY Led. (i) Thenumber of shares to be issued by AB Ltd; and (ii) The basis of allocation of the shares among the shareholders of XY Led Note: Present calculations in lakh BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Answer (i) | Value of equity of XY Ltd. based on future cash How capitalization 7592.40 lakhs [C105 x 0.93) + (120 x 086) + (125 x 0.79) + (120 x 0.74) + (100 x 0.68) + (2000.68) Value of equity of XY Led. based on not assets (150+ 200 — 100) 250,00 lakhs Average value [(592.40+ 250)/2] 21.20 lakhs (ii) Price per share of AB Ltd. for determination of number of shares to be issued: (570+ 430)/2 =%500 No. of shares in AB Ltd to b sued = € 4.21,20,000/ 500 = 84.240 shares (iii) Basis of allocation of shares Fully paid equivalent shares in X¥ Ltd. (20 lakhs + 5 lakhs) 25 lakh shares Distribution to fully paid shareholders (84240 x 20/25) 67,392 shares Distribution to partly paid shareholders (84,240 - 67,392) 16,840 shares Question 15 ABC Co. is considering a new sales strategy. They want to know the value of the new strategy. Following information relating to the year which has just ended, is available: Income Statement x 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 z 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 4% year onwards, cash flow will be stabilized. The net profit ratio, Assets turnover ratio and the incomatax rate will remain unchanged, Depreciation will be at 10% of value of net fixed assets at the beginning of the year. The Company’s target rate of return is 15%, Detormine the incremental value due to adoption of the strategy. SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Answer Projected Balance Sheet: Year 1 Year2 Year3 | Terminal Year Fixed Assets (40% of Sales) 9600 11,520 13,824 13,824 Gurrent Assets (20% of Sales) 4800 5,760 6,912 6,912 Total Assets 14,400 17,280 20,736 20,736 Equity 14,400 17,280 20,736 20,736 Projected Cash Flows: Year 1 ‘Year 2 ‘Years | Terminal Year Sales 24,000 28,800 34560 34,560 PBT (10% of Sale) 2,400 2,080 3,456 3,456 PAT (70% of PBT) 1,680 2,016 2,419.20 2,419.20 Depreciation 800 960 4182 1,382 Addition to Fixed Assets (2,400) (880) G.456) (1382) Increase in Current Assets (600) (060) (152) = Operating cash flow (FCFF) (720) (864) (1,036.80) 2,419.20 Projected Cash Flows: Present value of Projected Cash Plows: Cash Flows PVF at 15% Pv 720 0.870 ~626.40 864 0756 ~653.18 ~1,036.80 0658 196179 Residual Value = 2,419.20/ Present value of Residual value = 16,128/ (1.15)° = 16,128 x 0.658 = 10,612.22 Total shareholders’ value = 10,612.22 - 1,96 1.79 = 8,650.43 1S 6,128 Pre strategy value = 1,400/0.15 = 9,333.33 650.43 - 9.3333: Conclusion: The strategy is not financially viable. =-Value of strategy 682.90 Relative Valuation Models Question 16 A Ltd. made a Gross Profit of € 10,00,000 and incurred Indirect Expenses of € 4.00,000. The number of is 1,00,000. The company has a Debt of € 3,00,000 and Surplus Funds (Cash) to the BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation tune of € 5,00,000. The market related details are as follows: Risk ree Rate of Return 45% Market Rate of Return 12% Bof the Company 09 Determine: (@)__PerShare Barning Value of the Company. () Equity Value of the company if applicable EBITDA multiple is 5. (Assume Profit as EBITDA) Note: Present calculations in 000 Answer (a) Capitalization Rate using CAPM = 4.5% + 0.9 (12% - 45%) = 11.25% Calculation of Earning Value Per Share (000) Gross Profit 1,000 Less: Indirect Expenses (400) Profit 600 Barn ing Value of Company (600/0.1125) 5333.33 Number of Shares 1,00,000 Earning Value Per Share £53.33 (b) Equity Value of Company (000) EBITDA 600 EBITDA Multiple 5 Enterprise Value 3,000 Less: Debt (300) Ada: Surplus Funds (Cash) 500 Equity Value 3,200 Question 17 Thereis a privately held company X Pvt. Led thatis operating into the retail space, and is now scouting for angel investors. The details pertinent ta valuing X Pvt. Ltd areas follows: ‘The company has achieved break even this year and has an EBITDA of € 90, The unleveraged beta based on the industry in which it operates fs 1.8, and the average debt to equity ratio is havering at 40:60. The rate of return provided by risk free liquid bonds is 5%. The EV is to be taken at a multiple of 5 on EBITDA, The accountant has informed that the EBITDA of Z 90 induides an extraordinary gain of Z 10 for the year, and a potential write off of sales promotion costs of & 20 are still pending. SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation ‘The internal assessment of rate of market return for the industry is 11%. The FCFs for the next 3 years areas follows: Year1 Year2 Year3 Riture Cash flows (& 700 120 150 ‘The pre-tax cost of debt will be 12%, Assume a tax regime of 30%. ‘What is the potential valueto be placed on X Pvt, Ltd using following methods? (@ EBITDA Multiple Method (i) FCFF Method Answer (i) The adjusted EBITDA would be = 2 90 ~¥ 10-20 = %60 ‘The EV will be multiple ofS on 2 60 obtained above = 2300 (ii) The levered beta of the company will be = 1.8 [1 + (1 - 0.3) x (40/60)] = 2.64 ‘The Cost of equity in accordance with CAPM = Ret B (Ru~ Rd = 5% + 2.64 (11% - 5%) = 20.84% ‘The WACC = Cost of Equity + Cost of Debt = 20.84 (60/ 100) + 12.0 (1 -0.3) (40/100) = 15.86% Finally, the future cash flows can be discounted at the WACC obtained above as under Year 1 Year 2 Year 3 Future Cash flows (2) 100 120 150 Discount factor 0863 0.745 0.643 PVs of cash flows (3) 86,30 89.40 96.45 Value of the Firm = % 96,30 +3 89.40 +29645 = 727245 Question 18 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 followin ratios: (Market to book value Gi) Market to replacement cost (iil) Marketto sales (iv) Market to Net Income ‘The following data are available for your analysis: SK Led.(2) AS Ltd. (2) XY Led.(%) BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Book Value 400 300 250 Replacement Cost 600 550 500 Sales 550 450 500 Net Income 18. 16 14 Note: Round off ratios upto 3 decimals and value of equity upto 2 decimals. Answer Estimation of Ratios S.No. | Particulars SK Ltd. AS Ltd. ‘Average (@ _| Market to Book Value 450/400= 1.125 | 400/300= 1333 1229 (i)__| Market to Replacement Cost 400/550 = 0.727 0.739 Git) | Market to Sales 400/450 = 0.889 0.854 Gv)__| Market to Net Income 450/18 = 25 400/ 16 = 25 2S jon of Ratios to XY Ltd. Particulars XY Ltd.(%) | Average | Indicative Value of XY Ltd. (3) @ — | Book Value 250 1229 250x 1.229 = 307.25 Gi) | Replacement Cost S00 0739 500 x 0.739 = 36950 Gi) | sales 500 0854 500 x 0.854= 427.00 Gv) _| Net Income 14 25 14x 25 = 350.00 ‘Average 3363.44 Value of Equity of XY Ltd, according to the comparable method is € 363.44 Question 19 Using the chop-shop approach (or Break-up value approach), assign a value for Cornett GMBH. whose stock is currently trading at a total market price of € 4 million, For Cornett, the accounting data set forth in three business segments: consumer wholesaling, specialty services, and assorted centers, Data forthe firm's three segments are as follows: Business segment ‘Segment sales ‘Segment assets ‘Segment income Consumer wholesaling € 15,00,000 €7,50,000 ‘€ 100,000 Specialty services €8,00,000 €7,00,000 € 150,000 Assorted centers €20,00,000 € 30,00,000 € 600,000 Industry data for “pure-play” firms have been compiled and are summarized as follows: Business segment Capitalization/sales | Capitalization assets | Capitalization/operating income Consumer wholesaling O75 0.60 10.00 BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Specialty services 1.10 0.90 7.00 Assorted centers 1.00 0.60 6.00 Answer Cornett, GMBH. - Break-up valuation Business Segment Capital-to-Sales Segment Sales Theoretical Values Consumer wholesaling 07S € 15,00,000 €11,25,000 Specialty services 1.10 €8,00,000 € 880,000 Assorted centers 1.00 €20,00,000 £.20,00,000 Total value €40,05,000 Business Segment Capital-to-Assets Segment Assets Theoretical Values Consumer wholesaling 0.60 €7,50,000 € 450,000 Specialty services 0.90 €7,00,000 € 630,000 Assorted centers 0.60 € 30,00,000 € 18,00,000 Total value €28,80,000 Business Segment Capital-to-Operating Income | Segment Income | Theoretical Values Consumer wholesaling 10.00 ‘€ 1,00,000 € 10,00,000 Specialty services 7.00 €1,50,000 € 10,50,000 Assorted centers 6.00 €6,00,000 € 36,00,000 Total value €56,50,000 Average theoretical value - 42:05:00 +2 ae 000+ 5650.00 _ 41 7g.333 Average theoretical value of Cornett GMBH. = € 41,78333 Economic Value Added (EVA) and Market Value Added (MVA) Question 20 RST Ltd’s currant financial year's income statement reported its net income after tax ax 25,00,000. ‘The applicable corp orate income tax rate is 30%. Following is the capital structure of RST Lid. at the end of current financial year: z Debt (Coupon rate = 11%) Wiakhs Equity (Share Capital + Reserves & Surplus) 125 lakhs Invested Capital 165 lakhs SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Following data is given to ostimate cost of equity capital: Equity Beta of RST Ltd. 136 Risk-free rate Le. current yield on Govt, bonds 85% Average market risk premium (i.e, Excess of return on market portfolio over risk-free rate) 2% Required: (Q _Bstimate Weighted Average Cost of Capital (WACC) of RST Ltd and (ii) Bstimate Econ omicValue Added (EVA) of RST Id. Answer (Cost of Equity as per CAPM ke = Ret Bx Market Risk Premium 15% + 136 9% = 85% + 12.24% = 20.74% Cost of Debt Hy = 119% (1 - 0.30) = 70% E WACC= Rex Sot kek WACC= 20.74 x: +TI0% 125 40 T+ R540 = 1571+ 1.87 = 17.58% (ii) Taxable Income = % 25,00,000/(1 - 030) = 83571429 Operating Income = Taxable Income + Interest =€35,71,4294% £40,000 =% 40,11,429 EVA= EBIT(1 - Tax Rate) - [WACCx Invested Capital] = %40,11,429 (1 - 0.30) - [17.58% x 1,65,00,000] = % 26,08,000 - €29,00,700 = - 292,700 Question 21. STR Ltd’s current financial year’s income statement reported its net income after tax as 50 Crore, Following is the capital structure of $TR Lid. at the ond of current financial yoar: x Debt (Coupon rate = 1194) 80 Crore Equity (Share Capital + Reserves & Surplus) 250 Crore Invested Capital 330 Crore Following data is given to estimate cost of equity cap BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Asset Beta of TSR Led. Lt Risk tree Rate of Return 85% Average market risk premium % The applicable corp orate income tax rate is 30%. Estimate Economic Value Added (EVA) of STR Ltd. in lakh. Answer First of all to calculate Gost of Equity we shall comp ute the Equity Beta of STR Ltd. as follows: 8a Bex atm 250 M115 Bex 55 ag C030) fe= 1.36 then we shall compute the Gost of Equity as per GAPM as follows: Ke = Rr+ Bx Market Risk Premium = OS%+ 136x9% = 85% + 12.24% = 20.74% Cost of Debt (ha) = 11% (1 - 0.30) = 7.70% D wact= Kx ep thx a5 250 80 WAGE= 20-74% 369g #770 225 ag = 1571+ 1.87 = 1758% Taxable Income = 750 Crore/(1 - 0.30) = 07,142.86 lakhs Operating tn come = Taxable Income + Interest = T 7,142.86 lakhs + 7 980 lakhs = % 8,022.86 lakhs EVA = BRIT (1 ~Tax Rate) - [WACCx Invested Capital] $8,022.86 lakhs (1-030) - [17 58% x€ 330 Crore] = 5,616.00 lakhs ~ € 5,601.40 lakhs = -% 165.40 lakhs Question 22 With the help of the following information of Jatayu Limited! compute the Economic Value Added: Capital Structure Equity capital T 160 Lakhs Reserves and Surplus % 140 lakhs 10% Debentures & 400 lakhs Cost of eq) 14% SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Finan dal Leverage 15times Income Tax Rate 30% Note: Present calculations in t lakh Answer Finan cial Leverage = PEIT/ PBT 1.5 = PBIT/(PBIT- Interest) 415 = PBIT/(PBIT - 40) 1.5 (PBIT — 40) = PBIT 1.5 PBIT - 60 = PBIT 1.5 PBIT - PBIT = 60 0.5 PEIT = 60 PBIT = 60/055 = 120 lakhs NOPAT = PBIT - Tax = < 120 lakhs (1 - 0.30) = t B4lakhs Weighted Average Cost of Capital (WACC) = 14% x (800/700) + (4 - 0.30) x (10%) x (400/700) = 10% EVA = NOPAT - [WACCx Total Capital] EVA =% 4lakhs - 0,10 8 700 lakhs EVA =% L4 lakhs Question 23 ‘The following information is given for 3 companies that are identical except for their capital structure: Orange Grape Apple Total invested capital 1,00,000 100,000 1,00,000 Debt to invested capital ratio 08 os 92 Shares outstanding 6,100 8300 10,000 Pretax cost of debt 16% 13% 15% Gost of equity 26% 22% 20% Operating Income (EBIT) 25,000 25,000 25,000 ‘The tax rate is uniform 35% in all cases. (@ Compute the Weighted average cost of capital for each company. (i) Compute the Eoonomic Valued Added (EVA) for each company. (iil) Based on the EVA, which company would be con sidered for best investment? Give reasons. (iv) Ifthe industry PE ratio is 11x, (¥) Galaulate the estimated market capitalization for each of the Companies. pate the price for the share of each company. SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Answer ‘Working for calculation of WACC @ (a (iii) (vy) W Orange Total debt 80,000 50,000 20,000 Post tax Cost of debt 10.20% 845% 975% Equity Fund 20,000 50,000 80,000 wacc Orange: (10.4% 0.8) + (26 x0.2) = 13.52% Grape: (8.45 x 0.5)+ (22 x 0.5) = 15.25% Apple: (9.75 0.2) + 20x08) = 17.95% EVA of companies can be computed as follows: Orange Grape ‘Apple ‘wacc 13.52 15.228 17.98 EVA [EBIT (1 - T) - (WACC Invested Capital) Orange would be considered as the best investment since the EVA of the company is highest and its welghted average cost of capital is the lowest. Estimated Price of each company shares ‘Orange, Grape ‘Apple EBIT @) 25,000 25,000 25,000 Less: Interest (%) (12,800) (6500) (3.000) Taxable Income (2) 12,200 18,500 22,000 Less: Tax @ 35% (3) (270) (6475) (7,700) Net Income (%) 7,930 12,025 14,300 Shares 6,100 8.300 10,000 EPS (2) 130 1.45 143 Stock Price (EPS x PE Ratio) (%) 1430 15.95 15.73 Since the three entities have different capital structures they would be exposed to different degrees of financial risk. The PEratlo should therefore be adjusted for the risk factor. Market Capitalisation ‘Orange Grape Apple Estimated Stock Price (3) 1430 15.95 15.73 No. of shares 6,100 3,300 10,000 Bstimated Market Cap 87,230 132,385 1,57,300 SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Question 24 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 (@) Compute the operating income. (0) Compute the Economic Value Added (EVA), (Q Tender Ltd. has 6 lac equity shares outstanding. How much dividend can the company pay before the value of the entity starts declining? Answer (a) Taxable Income = 2 15 lac/(1 - 0.30) = 2142857 Operating Income = Taxable Income + Interest = 21,42,857 +3 10,00,000 = 3142857 (b) EVA= EBIT(1 - Tax Rate) - [WACC Invested Capital] = %3142,857 (1 - 0.30) - [13% 95,00,000] = %22,00,000 - X 12,35,000 = %9,65,000 %9,65,000 (2) BVADIvidend =F a9 = 1.6083 or t L61 Question 25 Delta Ltd's current financial year's income statement reports its net income as % 15,00,000, Delta's marginal tax rate is 40% and its interest expense for the year was © 15,00,000. The company has = 1,00,00,000 of invested capital, of which 60% is debt. In addition, Delta Ltd. tries to maintain a Weighted Average Cost of Capital (WACO) of 12.6%. (@ Compute the operating income or EBIT earned by Delta Ltd. in the current year. ii) Whats Delta Ltd.'s Economic Value Added (EVA) for the amrent year? Delta Ltd. has 2,50,000 equity shares outstanding. According to the EVA you computed in (ii), how much can Delta pay in dividend per share before the value of the company would start to decrease? If Delta does not pay any dividends, what would you expect to happen to the value of the company? Answer (i) Taxable income = Net Income /(1 - 0.40) Taxable income = 15,00,000/(1 - 0.40) = 25,00,000 Again, taxable income = EBIT - Interest EBIT= Taxable Income + Interest % 25,00,000+ % 15,00,000 = 40,00,000 BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation (i) EVA= EBIT(1 1) - [WAC x Invested capital] = © 40,00,000 (1 - 0.40) - 0.1267 1,00,00,000] = %24,00,000 - Z 12,60,000 = 7 11,40,000 %11,40,000 2,50,000, If Delta Ltd. does not pay a dividend, we would expect the value of the firm to increase because it ‘will achieve higher growth, hence a higher level of EBIT. If EBIT is higher, then all else equal, the ‘value of the firm will increase, ii) EVA Dividend = = 2456 Question 26 Herbal Gyan is a small but profitable producer of beauty cosmetics using the plant Aloe Vera. This is not a high-tech business, but Herbat’s earnings have averaged around % 12 lalth after tax, largely on the stren gth of its patented beauty cream for removing the pimples. ‘The patent har eight years to run, and Herbal has heen offered T 40 lakhs for the patent rights. Herbal’s assets indude T 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%. What is its Economic Value Added (EVA)? Note: Present all calculations in T lakh Answer EVA = Income earned - [Cost of capital x Total Investment] ‘Total Investments Particulars Amount ‘Working capital 20 lakhs Property, plant, and equipment 80 lakhs Patent rights 40 lakhs ‘Total 140 lakhs Cost of Capital = 15% EVA = 12 lakh - [0.15x 7 140 lakhs] = 312 lakh -€ 21 lakh ~3 Slakh ‘Thus, Herbal Gyan has a negative EVA of t 9lakhs. Question 27 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-valtie of T 100 Grore, 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 ST BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation (Profit) of Z 84 Crore, Tho rato on 365 days Government bond (Debt) is 10% per annum, Market portfolio generates a return of 12% per annum, The stock of the company moves in tandem with the market. Calculate Economic Value ad ded of the company. Note: Present calculations in Z crore Answer EVA = Income Earned - [Cost of Capital x Total Investment] Total Investments Amount (% Crore) Net Worth 200.00 Long Term Debts 400.00 Patent Rights 100.00 Total 700.00 E D WACC) = + (ke) ex SG tke 300 400 ACEO) = 12 500-¢ 905 ' 19* 500% 900 = 5.14% +5.71% = 10.85% EVA = Profit Barned ~ [WACGx Invested Capital] = 4 crore ~ [10.85% x3 700 crore] 7805 core Question 28 Fragrance Ltd. has reported a Net Operating Profit after Tax (NOPAT) to Invested Capital as 2.5% plus Weighted Average Cost of Capital (WACC) for the year 31: March 2025. Economic Value added is < 4 qrore as on 31 March 2025, Youare required to calculate ( Theamount of Invested Capital (i) NOPAT.f WACCis 10% Note: Present calculations in € crore Answer ()__ BVA= NOPAT—[WACCs Invested Capital] %4 Crore = NOPAT - [WACCx Invested Capital] 4 Crore = [WACC + 0.025] Invested Capital - [WACCx Invested Capital] 4 Crore = Invested Capital [0.025] Invested Capital = € 160 Crore SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation (fi) NOPATIFWACCis 10% %4Grore = NOPAT - 0.10 x 160 core NOPAT = 20 crore Question 29 Followingis the information of M/s. DY Ltd. for the year ending 31/03/2025: Sales 1,000 Lakh Operating Expenses Induding Interest 620 Lakh 8% Debentures 2250 Lakh Equity Share Capital (Face value of % 10 each) 3250 Lakh Reserves and Surplus 3250 Lakh Market Value of DY Ltd 900 Lakh Corporate Tax Rate 30% Risk free Rate of Return 7% Market Rate of Return 12% Equity Beta i You are required to (@_— Galaulate Weighted Average Cost of Capital of DY Ltd. (i) Calaulate Econ omic Value Added (iil) Calaulate Market Value Added Note: Presentall calculations in 2 lakh Answer (i) Weighted Average Cost of Capital of DY Ltd. Cost of Equity as per CAPM ke = Rr-+ Bx Market Risk Premium '%+ 14x [12% - 7%] = 7% + 7% = 14% Cost of Debt (ke) = B% (1 - 0.30) = 5.60% wheres = 1400x2+ 560 Ee * ep O* G50 7 80% 759 = 9.33% + 187% = 11.20% (ii) Economic Value Added (EVA) of DY Ltd. WACC OK) hex Sales Operating Expenses Induding Interest BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Less: Interest [¥ 250 Lakh x 8%] 20) (600) EBIT 400 Less: Tax @ 30% (120) Net Operating Profit after Tax (NOPAT) 280) Calaulation of Invested Capital Lakhs Equity Share Capital 250) Reserves & Surplus 250 8% Debentures 280 Total Invested Capital 750) EVA= NOPAT- [WACC Total Capital] = £280 Lakh -0.1120%% 750 lakhs EVA= 196.00 lakhs (ii) Determination of Market Value Added (MVA) Lakh Market value of DY Led. 900 Less: Invested Capital [{ 250 Lakh + % 250 Lakh +7 250 Lakh] so) Market Value Added 150 Question 30 Compute EVA of A Ltd. with the following information: All figure are in Tlakh Profit and Loss Statement Balance Sheet Revenue 1,000 | PPE 3,000 Direct Costs (390) | Current Assets 300 Selling, General & Admin, Exp. (SGA) (200) 1,300 EBIT 410 | Equity 700 Interest (10) | Reserves 100 EBT 400 | Long Term Borrowings 100 Tax Expense (120) | Current Liabilities & Provisions 400 EAT 280 1,300 Assume Bad Debts provision of % 20 lakh is induded in the SGA, and same amount is reduced from the trade receivables in current assets. Also assume that the pre-tax Cost of Debt is 12%, Tax Rate is 30% and Cost of Equity (i.e. shareholder's SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation expected return) is 8.45%, Also calculate MVA, if current market value of the firm's ¥ 1,000 lakch Note: Present all calculations in 7 lakh Answer Computation of NOPAT Particulars Tin lakh EBIT 410 Less: Taxes (4239 Add: Non-Cash Expenses 20 307 Computation of Invested Capital Particulars in lakh Total Assets. 1,300 Less: Current Liabil (400) 900 Add: Non-Cash Expenses 20 920 Computation of WACG WACC= Cost of equity + Cost of debt. Inthis case, WACC= [(800/ 900) x 8.45%] + [(100/900) x 12% (1 -030)] = 8.44% Computation of Capital Charge Capital Charge = Invested Capital x WACC = % 920 lakh x 8.44% = £77.65 lakh EVA = Adjusted NOPAT - Capital Charge = % 307 lakh - 277.65 lakh = 229.35 lakh MVA = Current Market Value of the firm - Invested Capital = 2 1,000 lakh -% 920 lakh = ¢ 80 lakh Question 31 The following data pertains to XVZ Inc. engaged in software consultancy business as on 31 December 2025 Statement of Profit & Lass (SMillion) Particulars Amount Income from consultancy 935.00 EBIT 180.00 Less: Interest an Loan (18.00) EBT 162.00 SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Less: Tax @ 35% (56.70) 105.30 Balance Sheet ($Million) Liabilit ‘Amount Assets ‘Amount Equity Stock (10 million share @ $ 10 each) 100 | Land and Building 200 Reserves & Surplus 325 | Computers & Softwares 295 Loans 180 | Current Assets: Current Liabili 180] Debtors 150 Bank 100 Cash 40 290 785 785 With the above information and following assumption, you are required to compute (@ Economic Value Added (0) Market Value Added Assuming that: (@ — WACCis 12% (ii) The share of company currently quoted at $50 each Note: Present all calculations in $ million Answer (a) Determination of Economic value added (EVA) Particulars $Million EBIT 180.00 Less: Taxes @ 35% (63.00) Net Operating Profit after Tax 117.00 Less: Cost of Invested Capital [W. N. 1] (72.60) Economic Value Added 44.40 (2) Determination of Market value added (MVA) Particulars $Million Market value of Equity Stock [W.N.2] 500 Equity Fund [W.N.3] 25 Market Value Added 75 Working Notes: (4) Total Invested Capital BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation Equity Stode $100 Million Reserve and Surplus $325 Million Loan £180 Million ‘£605 Million wacc 12% Cost of Invested Capital ($ GOS Million x 12%) $72.60 Million (2) Market Price per equity share (A) $50 No. of equity share outstanding (B) 10 Million. Market value of equity stock [(8) x (B)] $500 Million G) Equity Fund Equity Stock $100 Million Reserves & Surplus $325 Million $425 Million Question 32 Simple Ltd. and Dimple Ltd. are planning to merge. The total value of the companies is dependent on the fluctuating business conditions. The following information is given for the total value (debt + equity) structure of each of the two companies. Business Condition Probability Simple Ltd.(%Lacs) | Dimple Ltd.(% Lacs) High Growth 0.20 820 1,050 Medium Growth 0.60 550 825 Slow Growth 0.20 410 590 ‘The current debt of Dimple Ltd.is % 65 lacs and of Simple Ltd. is € 460 lacs. Calculate the expected value of debt and equity separately for the merged entity. Note: Present all calculations in € lacs Answer Compute Value of Equity Simple Ltd. Tin Lacs High Growth Medium Growth Slow Growth Debit + Equity 820 880 410 Less: Debt (460) (460) (460) Equity 360 90 (So) Since the Company has limited liability, the value of equity cannot be negative, therefore the value of SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)Business Valuation equity under slow growth will be taken as zero because of insolvency risk and the value of dobtis taken at 410 lacs. The expected value of debt and equity can then be calailated as: Simple Ltd. Zin Lacs. Hi , Expected ligh Growth Medium Growth Slow Growth Value Prob. Value Prob. Value Prob. Value Debt 0.20 460 060) 460 0.20 410 450 Equity 020 360 060 90 0.20 0 126 820 880 410 576 Dimple Ltd. 760 Debt 920 060 6s 0.20 6s 65 825 590 823 Expected Values Equity Tin Lacs Debt in Lacs Simple Ltd. 126 Simple Led. 450 Dimple Ltd. 758 Dimple Id. 65 B84 515 SS BY CA AJAY AGARWAL (AIR-1) AIRICA Career Institute (ACI)