CORPORATE VALUATION & VAL

EXCEL SPREADSHEETS FOR SOLV

DR. PRASANNA CHAND

TION & VALUE CREATION

TS FOR SOLVED PROBLEMS

ANNA CHANDRA
 Solved Problem 2.1
Profit and Loss Account ( Rs. In million)
Year 1 2
Net sales 5,600 6,440
Income from marketable securities 140 210
Non-operating income 70 140
Total income 5,810 6,790
Cost of goods sold 3,220 3,780
Selling and administrative expenses 700 770
Depreciation 350 420
Interest expenses 336 392
Total costs and expenses 4,606 5,362
PBT 1,204 1,428
Tax provision 364 448
PAT 840 980
Dividend 420 560
Retained earnings 420 420
Balance Sheet
Equity capital 2,100 2,100
Reserves and surplus 1,680 2,100
Debt 2,520 2,940
Total 6,300 7,140
Fixed assets 4,200 4,550
Investments 1,260 1,400
Net current assets 840 1,190
Total 6,300 7,140
Tax rate 0.4
EBIT for year 2= 1,470
Tax on EBIT for year 2= 465
NOPLAT for year 2 = 1,005
FCFF for year 2 = 389

Solved Problem 2.2

(Amounts in Rs.million)
Expected free cash flow of the firm 54
Expected growth rate 9%
Cost of equity 20%
Post-tax cost of debt 10%
Market value of equity/Book value 3
Market value of debt /Book value 0.9
Value of the firm on book value weights basis 1,800
WACC 12.00%
 Value in B43 is obtained using the Solver
function and equating the formula in B44 to
Book value weight for equity used to get WACC 0.20 12%
WACC using the book value weights 0.12
Formula used in cell B44 is =B43*B37+(1-B43)*B38
Debt equity ratio 4
Market value of equity 0.6
Market value of debt 0.72
WACC using the market value weights 14.55%
Value of the firm on market value weights basis 973.77
 Solved Problem 1 (Amounts in Rs.million)

Growth Growth
rate rate
during during
high Stable stable
High growth growth growth growth
Base Year phase phase period period
No of years 4
Revenues 3,000 20% 10%
EBIT 500 20% 10%
Capital expenditure 350 20%
Depreciation 250 20%
Working capital as a percentage of
revenues 25% 25% 25%
Corporate tax rate ( for all time) 30%
Paid-up equity capital (Rs.10 par) 400
Market value of debt 1,200
Pre-tax cost of debt 13% 12.14%
Debt - equity ratio 1 is to 1 2 is to 3
Risk-free rate 11% 10%
Market risk premium 7% 6%
Equity beta 1.129 1
WACC 14.00% 13.00%
Calculation of forecasted FCF
Terminal
Year 0 1 2 3 4 year
Revenues 3,000 3,600 4,320 5,184 6220.8 6842.88
EBIT(1-t) 350 420 504 604.8 725.76 798.34
Capital expenditure - depreciation 100 120 144 172.8 207.36
Δworking capital 150 180 216 259.2 155.52
FCFF 150 180 216 259.2 642.82
PV of FCF during the explicit forecast
period 569.32
Terminal value of the cash flow 21,432.92
PV of the terminal cash flow 12,689.34
Value of the firm 13,258.66
 Solved Problem 1
Given: Solution: Formula
ROE 20% P0/E1 =B5/(B4-B3*(1-B5))
Cost of equity 15% P0/BV0 =B3*(1+B8)*B5/(B4-B8)
Dividend payout ratio 0.4 P0/S0 =B7*(1+B8)*B5/(B4-B8)
Book value per share Rs. 50 PEG =E3/B8/100
Net profit margin 10% Value ratio =E4/B3
Growth rate 12%

Solved Problem 2 (Rs.in million)

ROIC 16%
g 10%
DA 8%
tax rate 30%
WACC 13%
EBITDA in Rs.million 300
EV/EBITDA 8.05
EV in Rs.million 2415
13.33
2.99
1.49
1.11
14.93
 Solved Problem 1
(Rs. in million)
Proposed investment in the equity 3,000
Required return from the investment 35%
Planned holding period(years) 5
Projected EBITDA for year 5 4,000
Reasonable EBITDA multiple for year 5 6
Likely debt at the end of year 5 2,500
Likely cash balance at the end of year 5 800
Required value of PE investments 13,452
Estimated equity value at the end of year 5 22,300
(i) Ownership share 60.32%
(ii) Post-money investment value of the firm's equity 4,973
(iii) Pre-money investment value 1,973
 Solved Problem 19.1
Return on equity 25%
Dividend payout ratio 0.4
Return required on equity 18%
Book value per share(Rs.) 50
Growth rate 0.15

(a) Market price per share

according to Marakon Model 166.67
(b) If return on equity falls to 22%
Growth rate 0.1629 using Goal Seek function under Tools menu
M/B 3.333012219145 and setting the formula for M/B to 3.33(166.67/50)
Formula used in cell B10 =(B8-B9)/(B4-B9)
Solved Problem 19.2
Gross margin 20%
Ratio of selling , general and
administrative expenses to
sales 10%
Discount rate 15%
Tax rate 30%
Growth rate in sales if new
strategy adopted 20%
Period of growth in years
under new strategy 3
Ratio of depreciation to net
fixed assets at the beginning
of the year under the new
strategy 10%
Current values Income statement projections
Year 0 1 2 3 4
Sales 10,000 12,000 14,400 17,280 17,280
Gross margin 2,000 2,400 2,880 3,456 3,456
Selling and general
administration 1,000 1,200 1,440 1,728 1,728
Profit before tax 1,000 1,200 1,440 1,728 1,728
Tax 300 360 432 518.4 518.4
Profit after tax 700 840.00 1008.00 1209.60 1209.60
Balance sheet projections
Fixed assets 4000 4800 5760 6912 6912
Net current assets 2000 2400 2880 3456 3456
Total assets 6000 7200 8640 10368 10368
Equity 6000 7200 8640 10368 10368
Cash Flow projections
Profit after tax 840.00 1008.00 1209.60 1209.60
Depreciation 400 480 576 691.2
Capital expenditure 1200.00 1440.00 1728.00 691.20
Increase in net current assets 400.00 480.00 576.00 0.00
Operating cash flow (360.00) (432.00) (518.40) 1209.60
Present value of the
operating cash flow stream (980.55)
Residual value 8064
Present value of the residual
value 5302.21
Total shareholder value 4321.66
Pre-strategy value 4666.67
Value of the strategy -345.01

Solved Problem 19.3

No.of years of supernormal
profit expected ahead 6
Return expected in the
supernormal profit period 30%
Projected new investments
per year( in Rs.million) 100
Cost of capital 20%
Value of the forward
plan(Rs.in million) 250
Solved Problem 19.4
Annual
costs(exclu
ding depn.
Project life in Salvage Annual Interest and
Investment outlay years value revenues taxes)
5,000 4 0 6,000 4,000
Debt-
equity Cost of Post-tax
Depreciation Tax rate ratio equity cost of debt
Straight line 40% 4/5 18% 9%
Cost of capital 14.00%
Calculation of EVA over the project life
Year 1 2 3 4
Revenues 6,000 6,000 6,000 6,000
Costs 4,000 4,000 4,000 4,000
PBDIT 2,000 2,000 2,000 2,000
Depreciation 1,250 1,250 1,250 1,250
PBIT 750 750 750 750
NOPAT 450 450 450 450
Cash flow 1,700 1,700 1,700 1,700
Capital at charge 5,000 3,750 2,500 1,250
EVA -250 -75 100 275
NPV( using EVA) (46.7)
NPV(using cash flow) (46.7)

Solved Problem 19.5

Cost of the equipment 2,000,000
Economic life in years 4
Expected salvage value 600,000
Cost of capital 12%
PV of salvage value 381,311
PV of annuity 1,618,689
Annuity amount 532,928
Depreciation charge under sinking fund method
Capital 2,000,000 1,707,072 1,378,992 1,011,543
Capital charge 240000 204848.61 165479.1 121385.165
Annuity amount 532,928 532,928 532,928 532,928
Depreciation 292,928 328,080 367,449 411,543
 Solved Problem 19.6
(Amounts in Rs.million)
NOPAT 21.085
Investment in fixed assets 250
Investment in current assets 50
Economic life in years 14
Salvage value of fixed assets 0
Cost of capital 10%
Annual depreciation 17.86
End of year 1 2 3 4 5
Net value of fixed assets 232.14 214.29 196.43 178.57 160.71
Investment in current assets 50 50 50 50 50
Total capital employed( book
value) 282.14 264.29 246.43 228.57 210.71
ROCE for year 5 9.22%
ROGI for year 5 12.98%
Economic depreciation 8.937
CVA for year 5 0