CORPORATE VALUATION USING ASSET-BASED APPROACHES

The following is the balance sheet of Hypothetical Co. Ltd. as on March 31, current year.

Liabilities Amount (Rs. lakhs)

Assets Amount (Rs. lakhs)

Share Capital

40,000 11% Pref shares of Rs.100 each, fully paid up

1,20000 Equity shares of Rs.100 each, fully paid up

40

120

Fixed Assets Less: Dep

150 30 120

P&L a/c 23 Current Assets: Stocks Debtors Cash & Bank Preliminary Expenses

100 50 10 160 2

10% Debentures 20

Trade creditors 71 Provision for Y tax 8

282 282

Additional Info:

1. A firm of professional valuers has provided the following mkt. estimates of its various assets:

FA: Rs.130 lakhs, Stocks: Rs.102 lakhs, Debtors: Rs.45 lakhs. Other assets should to be taken at

balance sheet values.

2. The company is yet to declare & pay dividend on preference shares.

3. The valuers also estimate the current sale proceeds of firm’s assets in the event of its

liquidation: FA: Rs.105 lakhs, Stocks: Rs.90 lakhs, Debtors: Rs.40 lakhs. Besides the firm has to

incur Rs.15 lakhs as liquidation costs.

You are required to compute the value of the firm per share as per –

i) Book Value

ii) Adjusted Book Value

iii) Liquidation Value

DISCOUNTED CASH FLOW TECHNIQUE FOR CORP VALUATION

Sagar Industries deals in the production & sales of consumer durables. Its expected sales revenues (in Rs.

millions) for the next 8 years are –

Years 1 2 3 4 5 6 7 8

Sales Revenue 80 100 150 220 300 260 230 200 The condensed Balance Sheet as on March 31, current year is –

Liabilities Amount (Rs. mn) Assets Amount (Rs. mn) Equity funds 120 Current Assets 30

12% Debt 80 LT Assets (net) 170

200 200

Additional Inputs –

1. Variable expenses will amount to 40% of sales revenue.

2. Fixed cash operating costs are estimated to be Rs.16 mn/yr. for the first 4 years & at Rs. 20 mn

for years 5-8.

3. In addition, an extensive advertising campaign will be launched, requiring annual outlays as

follows –

Year 1 2-3 4-6 7-8 Amount (Rs mn) 5 15 30 10

4. LT assets are subject to 15% rate of depreciation on diminishing balance method.

5. The co. has planned the following capital expenditure (assumed to have been incurred in the

beginning of each year) for the next 8 years

Year 1 2 3 4 5 6 7 8

Amount (Rs. mn) 5 8 20 25 35 25 15 10 6. WC in terms of investment in current assets is estimated at 20% of sales revenue.

7. It is expected to have non-operating assets in terms of investments in marketable securities in

the initial year only. The expected after tax non-operating cash flow in year 1 is Rs 0.5mn

8. Given the tax benefits to Sagar, the effective tax rate is estimated at 30%

9. The corporate equity capital is estimated at 16%.

10. Free cash flow to the firm are expected to grow at 5%/yr. after 8 yrs

Determine the discounted cash flow value of (a) firm (b) equity

NOTE: CALCULATE THE PRESENT VALUE OF FREE CASH FLOWS IN THE EXPLICIT PERIOD USING:

A: Sales Revenue

B:Less: Expenses

i. Var Cost

ii. Fixed Cash Op Exp

iii. Advtg. Exp

iv. Dep

C: PBT (A-B)

D: Less tax (30%)

E: Profit after tax (PAT)

F: Non Operating Income

G: Gross Cashflow (E+F+Dep)

H: Less: Investments

I:FCFF (G-H)

J: PVIF@13%

K: PV OF FCFF