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Discount Rate (PVIF @ 25%)
Column 1 * 3
3.50
D
D
45
D
CF Total
CDD
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Cash Inflow
Discount Rate (PVIF @ 25%)
Column 2 * 3
1
CE
D
D
2
F
EF
3
E
E
C
3
E
E
CD
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# 3 ey premise: *#)2?$9,3-(',01(,//)&=#2,%(.1+%"($-2&*%"("#5"5)&7%"/()#&./3-$,$%,13( 5)&7%"/()#&. 3 ey risk: (0$#%#9#%+ &* %()2#0,3 9,3-($ %& '"&#'( &* ,$$-2/%#&0$ ,1&-% $%,13( 5)&7%" ),%( ,0. .#$'&-0%),%(,$$&'#,%(.7#%"%",%/()#&. 3 Stable growth rate: "(*#)2?$5)&7%"),%(%",%#$(=/('%(.%&3,$%*&)(9()(0(),33+(<-,3%&&)3($$%",0 %"(#0.-$%)+&)&9(),33('&0&2+?$5)&7%"),%(&)2-3%#0,%#&0,3*#)2$%"(5)&7%"),%( #$%"(7&)3.('&0&2+?$),%(&*5)&7%" 3 Length of the high growth period: "( 5)(,%() %"( '-))(0% 5)&7%" ),%( &* , *#)2?$ ',$" *3&7 )(3,%#9( %& %"( $%,13(5)&7%" ),%(%"(3&05()%"("#5"5)&7%"/()#&. "()( ,)( $(9(),3 .#9#.(0. .#$'&-0% 2&.(3$ 1,$(. &0 .#**()(0% ,$$-2/%#&0$ *&) %"( ',3'-3,%#05%"(9,3-(&*%"($%&'8&2(&*%"(2,)(
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
,3-(&*%"(%&'8M N5 )5
H"()(
M=/('%(. #9#.(0.$()",)(.-)#050(=%/()#&. )M(<-#)(.),%(&*)(%-)0*&)(<-#%+#09($%&)$ 5M)&7%"),%(#0.#9#.(0.$*&)(9()
For Example: GU%.",.(,)0#05/()$",)(&*$ F3,$%+(,),0./,#.&-%E I&*#%$(,)0#05,$ .#9#.(0.$ %?$(,)0#05,0..#9#.(0.",.5#9(0,% I/()+(,)#0%"(3,$% +(,)$,0.,)( (=/('%(.%&5)&7,%%"($,2(),%(#0%"(3&05%()2"()(<-#)(.),%(&*)(%-)0&0%"( $%&'8&*GU%.#$ I&2/-%(%"(,3-(&*%"(%&'8-$#05&).&0?$ &.(3 Solution: M$ F
M E M E F M$E D =/('%(.5)&7%"),%(#0(,)0#05$,0..#9#.(0.$M I ,3-(&*%"(<-#%+M N5 )5 ME D N MFDF "()(*&)(,3-(&*",)(&*GU%.MRs 68.64
$
3 "(-$(&*%"#$2&.(3#$)($%)#'%(.%&*#)2$%",%,)(5)&7#05,%,$%,13(),%("( ,$$-2/%#&0 %",% %"( 5)&7%" ),%( #0 .#9#.(0.$ ",$ %& 1( '&0$%,0% &9() %#2( #$ , .#**#'-3%,$$-2/%#&0%&2((%($/('#,33+5#9(0%"(9&3,%#3#%+&*(,)0#05$ 3
$$-2(.5)&7%"),%(2,+1(#0'&))('%
3 "(5)&7%"),%(#$(<-,3%&%"()(<-#)(.),%(&*)(%-)0%"(0%"(9,3-(&*%"($%&'8 ,//)&,'"($#0*#0#%+ *%"(5)&7%"),%(#$"#5"()%"(0%"()(<-#)(.),%(&*)(%-)0 %"(0 %"( 9,3-( &* %"( $%&'8 1('&2($ 0(5,%#9( *#)2 ',00&% 5)&7 #0 %"( 3&05 %()2,%,),%(#0%"(('&0&2+ 3 "(*,3$(,$$-2/%#&0#$%",%#09($%&)$7#33"&3.$",)($*&)#0*#0#%(/()#&.&*%#2(
P "('&0$%,0%5)&7%",$$-2/%#&02,+0&%1()(,3#$%#'#02,0+$#%-,%#&0$"(5)&7%"#0 .#9#.(0.$2,+1(,%9,)+#05),%($ %+/#',3$#%-,%#&0*&)2,0+'&2/,0#($2,+1(%",% ,/()#&.&*(=%),&).#0,)+5)&7%"(#%"()5&&.&)1,.7#33/)(9,#3*&),'()%,#00-21() &* +(,)$ ,*%() 7"#'" 5)&7%" 7#33 '",05( %& , 3(9(3 ,% 7"#'" #% #$ (=/('%(. %& '&0%#0-( #0.(*#0#%(3+"#$$#%-,%#&0',01()(/)($(0%(.1+, -3%#/3()&7%" &.(3 ,3$&80&70 ,$- two stage growth model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
Example '&2/,0+/,#.,.#9#.(0.&*$ E/()$",)(.-)#05%"('-))(0%+(,) %#$(=/('%(. %&/,+,.#9#.(0.&*$ /()$",)(.-)#05%"(0(=%+(,) 09($%&)*&)(',$%,.#9#.(0.&* $C ,0. $CE /() $",)( )($/('%#9(3+ .-)#05 %"( $-1$(<-(0% +(,)$
*%() %",% #% #$
(=/('%(.%",%,00-,3.#9#.(0.$7#335)&7,% I/()+(,)#0%&,0#0.(*#0#%(*-%-)("( )(<-#)(.),%(&*)(%-)0#$ I,3'-3,%(%"(9,3-(&*%"($%&'8 Solution, ,3'-3,%#&0&*&*.#9#.(0.$.-)#05$-/()0&)2,35)&7%" Year Future Value PVIF @ 20%
PVIF * F.V
1
DCC
FF
2
C
F!E
DE
3
CE
E D Total
C 5.77
,3'-3,%#&0&*&*()2#0,3)#'( 0M N5 ):50 N8V0 H"()( 0M)#'(,%%"((0.&*+(,)0
M=/('%(..#9#.(0./()$",)(#0+(,)% )M)(<-#)(.),%(&*)(%-)0 50M%(,.+$%,%(5)&7%"),%(*&)(9(),*%()+(,)0 CM N5 ):50 N8VC MCE N : N VC
M D ,3-(&*%"($%&'8ME
N D
M D E "()(*&)(9,3-(&*%"($%&'8,*%()$-/()0&)2,35)&7%"/()#&.#$$ D E
$
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3 "(*&'-$&0.#9#.(0.$#0%"#$2&.(3',03(,.%&$8(7(.($%#2,%($&*9,3-(*&) *#)2$%",%,)(0&%/,+#05&-%7",%%"(+',0,**&).#0.#9#.(0.$ 0/,)%#'-3,)7( 7#33-0.()($%#2,%(%"(9,3-(&**#)2$%",%,''-2-3,%(',$",0./,+&-%%&&3#%%3( #0.#9#.(0.$ a
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$ 3 "#$,//)&,'"#$(,$#($%%&-$(*&),$$(%$*#)2$7"&$( W,$"*3&7$,)('-))(0%3+/&$#%#9(,0. W,01(($%#2,%(.7#%"$&2()(3#,1#3#%+*&)*-%-)(/()#&.$,0. W H"()( , /)&=+ *&) )#$8 %",% ',0 1( -$(. %& &1%,#0 .#$'&-0% ),%($ #$ ,9,#3,13(
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$
3 #0'(#%#$,0,%%(2/%%&($%#2,%(#0%)#0$#'9,3-(#%)(<-#)($*,)2&)(#0/-%$,0. #0*&)2,%#&0%",0&%"()9,3-,%#&0,//)&,'"($ 3 "($( #0/-%$ ,0.#0*&)2,%#&0 ,)( 0&% &03+ 0&#$+ ,0. .#**#'-3% %& ($%#2,%( 1-% ',0 1( 2,0#/-3,%(. 1+ %"( $,99+ ,0,3+$% %& /)&9#.( %"( '&0'3-$#&0 "( &) $"( 7,0%$
Example, Excel Chemicals Company: Summarized Balance Sheet Rs. In Rs. In Crore Crore &-)'(&**-0. ",)("&3.()$*-0. ,#.-/',/#%,3 E')&)($",)($&*$ E (,'" ($()9($-)/3-$ E F E
&))&7(.-0. ('-)(. 0$('-)(. !E !E ,/#%,32/3&+(. ! $($&**-0. )&$$13&'8 FE ($$B (/)('#,%#&0 DE (% 3&'8 C 09($%2(0% C -))(0% $$(% EC ($$B-))(0%#,1#3#%#($ D 575 (%-))(0% $$(%$ (% $$(%$ !
Excel chemicals summarized profit and loss account and per share data ø
(%,3($ &$%&*5&&.$$&3.
(/)('#,%#&0 (33#05,0. .2#0#$%),%#9((=/(0$( &%,3(=/(0$( 0%()($% ,= ()$",)(.,%,
&&89,3-( ,)8(%9,3-( #5" &7 9(),5( A),%#& #5" &7 9(),5(
!!E C F ! E ! C E DF C C F ! F D
E CE E E C C E F CE F !
ED E E D E C C CE C F CC E D
F FE E ! E E E E C D CE F F E D
F!E !E C EC ED C D E DC C $ ! D C D F
%$ $,3( ",$ 5)&70 %& I .-)#05 %"( +(,) "( ='(3$ 2,0,5(2(0% 7&-3. #0')(,$( 5)&7%" ),%( %& D I 7#%"#0 C +(,)$ )(.-'( %& FFI ,0. $(33#05 .#$%)#1-%#&0 (=/(0$( %& EI &* $,3($ ,/#%,3 =/(0.#%-)( #$ EI &* $,3($ ,= ),%( #$ CE I
(/)('#,%#&0#$X I"(5)&7%"),%(#$FI,3'-3,%(9,3-(&*<-#%+
Solution, Particulars
2004
2005
2006
2007
F!E
D
DDF
!E
D
DC
CEC
C
C C
C
C C
Less: Depreciation
E
EE
F
Profit Before Tax
ED
!D
F
C
Less: Tax @ 35%
EE
F!
DF
F
Profit After Tax
C
!
F
!D
Add: Depreciation
E
EE
F
Cash Flows
C
D
E
ED
Less: CAPEX
D!
!
Less: Changes in Working Capital
C
CF
F
143
61
85
111
Sales Less: Cost of goods sold
(% of Sales)
Less : Selling & Distribution Expenses
(% of
Sales)
Net Free Cash Flow
Working Notes, 1) Calculation of Depreciation; Year
Asset (Rs.)
2004 2005 2006 2007
Capital Expenditure
Total Assets
EI&*,3($ C !
&3-20 NC D! F ! E EE
Depreciation Net Assets (Rs.) I E EE F
! !
2) Calculation of net change in working capital Year 2004 2005 2006 2007
Sales F!E D DDF
Working Capital as % of Sales C I C I C I C I
Working Capital E E F E F FD
Change in Working Capital C CF F
Calculation of Cost of Debt .M %,= M E CE M! EI Calculation of Cost of Equity (M Y5 M YFI ! M DCI Calculation of WACC (Weighted Average Cost of Capital);
e d
Book Value weights Cost of Equity Column 3 * 4 F E F!F DC C FD !E C ! E !F 0.1328568
WACC = 13% ),%(&*)(%-)0 H(7#33.#$'&-0%(,'"0(%',$"*3&71+ CI
Calculation of Salvage Value; ,39,5(,3-(M(%,$"3&7 N5 )5 M N F CIFI M$ FD &%,3,3-(&*%"(#)2M(%,$"3&7Y X CI Year Net Cash Flow PVIF @ 13% 2005 F DDE 2006 DE DC 2007 F!C FD ,39,5(,3-( F!C Total Value Of the Firm ,3-(&*%"(#)2M CF ($$,3-(&* (1%M !E*)&2%"( ,3,0'("((% ,3-(&*<-#%+M 1067 -21()&*<-#%+",)($#0='(3M E')&)( ,3-(&*,'"",)(M,3-(&*<-#%+ -21()&*<-#%+",)($ M F E M$ FD Value of Equity Shares = 42.68
DCF EC!DE FFEEE F! C F !CC CF C!F
The constant growth FCFE model
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(/)('#,%#&0/()$",)( EE H&)8#05',/#%,3#0')(,$(./()$",)( F!
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Solution, Particulars -))(0% (Less) ,/#%,3$/(0.#05 (/)('#,%#&0 (Multiply) (1%),%#& (Less) Z7&)8#05',/#%,3 (Multiply) (1%),%#& Free Cash Flow to the Equity
Rs. Rs. E E E CI D F CI 4.85
Cost of Equity = IN =EI = EI Rate of Return = EI Value of stock = DE= E E E MF ! Value of Equity Share = Rs. 67.9
P ' "(%7&$%,5(2&.(3#$.($#50(.%&9,3-(,*#)27"#'"#$(=/('%(.%&5)&72-'" *,$%()%",0,$%,13(*#)2#0%"(#0#%#,3/()#&.,0.,%,$%,13(),%(,*%()%",%"(%7&$%,5( 2&.(3#$.($#50(.%&9,3-(,*#)27"#'"#$(=/('%(.%&5)&72-'"*,$%()%",0, $%,13(*#)2#0%"(#0#%#,3/()#&.,0.,%,$%,13(),%(,*%()%",%)&2%"#$2&.(39,3-(7#33 1(',3'-3,%(.,$*&33&7$
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"(%()2#0,3/)#'(#$5(0(),33+',3'-3,%(.-$#05%"(#0*#0#%(5)&7%"),%(2&.(3
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Works best for: "#$ 2&.(3 2,8($ %"( $,2( ,$$-2/%#&0$ ,1&-% 5)&7%" ,$ %"( %7&$%,5( .#9#.(0. .#$'&-0%2&.(3#(%",%5)&7%"7#331("#5",0.'&0$%,0%#0%"(#0#%#,3/()#&.,0..)&/ ,1)-/%3+ %& $%,13( 5)&7%" ,*%() %",% % #$ .#**()(0% 1(',-$( &* #%$ (2/",$#$ &0 ),%"()%",0.#9#.(0.$&0$(<-(0%3+#%/)&9#.($2-'"1(%%())($-3%$%",0%"(.#9#.(0. .#$'&-0% 2&.(3 7"(0 9,3-#05 *#)2$ 7"#'" (#%"() ",9( .#9#.(0.$ 7"#'" ,)( -0$-$%,#0,13(1(',-$(%"(+,)("#5"()%",0&)7"#'"/,+3($$#0.#9#.(0.$%",0 %"(+',0,**&).%&#(.#9#.(0.$,)(3($$%",0
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Works best for: #0'(%"(2&.(3,33&7$*&)%")(($%,5($&*5)&7%",0.*&),5),.-,3.('3#0(*)&2"#5"%& $%,13(5)&7%"#%#$%"(,//)&/)#,%(2&.(3%&-$(%&9,3-(*#)2$7#%"9()+"#5"5)&7%" ),%($ '-))(0%3+ "( ,$$-2/%#&0$ ,1&-% 5)&7%" ,)( $#2#3,) %& %"( &0($ 2,.( 1+ %"( %")(($%,5( .#9#.(0. .#$'&-0% 2&.(3 1-% %"( *&'-$ #$ &0 #0$%(,. &* .#9#.(0.$ 2,8#05#%2&)($-#%(.%&9,3-(*#)2$7"&$(.#9#.(0.$,)($#50#*#',0%3+"#5"()&)3&7() %",0%"(
3If firm is ,)5(,0.5)&7#05,%,),%('3&$(%&&)3($$%",05)&7%"),%(&*%"(('&0&2+&) &0$%),#0(.1+)(5-3,%#&0*)&25)&7#05,%),%(*,$%()%",0%"(('&0&2+ ,$%"('",),'%()#$%#'&*,$%,13(*#)2,9(),5()#$8)(#09($%2(0%),%($ Use a Stable Growth Model
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Example:
&33&7#05#$%"(1,3,0'($"((%&*G%.,$&0 ,)'"C D $ 0,8" Liabilities Share Capital 40,000 11% Preference Share
Amt (Rs.)
of Rs. 100 each, Fully paid 1,20,000 Equity Shares of Rs
Assets
Amt (Rs.) Amt (Rs.)
#=(. $$(%$
E
($$B (/)('#,%#&0
C
%&'8$
100 each, Fully paid
Profit and Loss Account
C
(1%&)$
E
10 % Debentures
,$",0. ,08
Trade Creditors
)(3#2#0,)+=/
Provision for Income Tax
D
282
282
Additional Information:
*#)2&*)&*($$#&0,3,3-()$",$/)&9#.(.%"(*&33&7#052,)8(%($%#2,%($&*#%$ 9,)#&-$,$$(%$#=(. $$(%$$ C 3,8"%&'8$$ 3,8" (1%&)$$ E3,8" 33&%"(),$$(%$,)(%,8(0,%%"(#)1,3,0'($"((%9,3-($
"(&2/,0+#$+(%%&.('3,)(,0./,+.#9#.(0.&0)(*()(0'(",)($ C "(,3-(,3$&($%#2,%(%"('-))(0%$,3(/)&'((.$&*%"(*#)2?$,$$(%$#0%"((9(0% &*#%$3#<-#.,%#&0*#=(.,$$(%$$ E3,8"$%&'8$! 3,8".(1%&)$$ 3,8"
($#.($%"(*#)2#$%�'-)$ E3,8",$3#<-#.,%#&0'&$%$
&- ,)( )(<-#)(. %& '&2/-%( %"( 0(% ,$$(% 9,3-( /() $",)( ,$ /() $",)( 2,)8(% 9,3-( ,0.3#<-#.,%#&09,3-(1,$($
Solution: Determination of Net Value Per Share
1) Book Value Basis Particulars
Amt (Rs.)
Amt(Rs.)
Fixed Assets (net)
Current Assets:
Stocks
Debtors
E
Cash and Bank
F
Total Assets
Less: External Liabilities
D
10% Debentures
Trade Creditors
Provision for Income Tax
D
11% Preference Share Capital
Dividend on Preference Share
(0.11 * Rs 40 Lakh)
C
Net Assets Available for Equity Shareholder
CFF
Divided by the number of Equity Shares (in lakh)
Net Assets Value Per share (Rs)
113.83
2) Market Value Basis
Particulars
Amt (Rs.)
Amt(Rs.)
Fixed Assets (net)
C
Current Assets:
Stocks
Debtors
E
Cash and Bank
E
Total Assets
D
Less: External Liabilities
(as per details given above)
C
Net Assets Available for Equity Shareholder
CF
Divided by the number of Equity Shares (in lakh)
Net Assets Value Per share (Rs)
119.67
3) Liquidation Value Basis Particulars
Amt (Rs.)
Amt(Rs.)
Fixed Assets (net)
E
Current Assets:
Stocks
!
Debtors
Cash and Bank
Total Assets
E
Less: External Liabilities
(as per details given above)
C
Net Assets Available for Equity Shareholder
DFF
Divided by the number of Equity Shares (in lakh)
Net Assets Value Per share (Rs)
"(
72.17
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