equity valuation cases

8/6/2019 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


3 Cash Flow From operations

Less: Capital ExpenditureInvestment

Add: Net Borrowing

Notes payable



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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?

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