The balance sheet of W Ltd. at the end of year zero is as follows: Liabilities Assets Shareholders funds Net fixed assets 550 Equity capital (20,00,00,000 shares of ₹10 each) 200 Networking capital 200 Reserves and surpl

CS Professional · Valuations & Business Modelling · PYQS · June 2021
The balance sheet of W Ltd. at the end of year zero is as follows: Liabilities Assets Shareholders funds Net fixed assets 550 Equity capital (20,00,00,000 shares of ₹10 each) 200 Networking capital 200 Reserves and surplus 300 Loan funds (rate 10%) 250 Total 750 Total 750 The return on assets (Net Operating Profit After Taxes (NOPAT)) is expected to be 18% on the asset value at the beginning of each year. The growth rate in assets and revenues will be 30% for the first 3 years, 18% for the next 2 years and 10% thereafter. The effective tax rate of the firm is 34%. The pre tax cost of debt is 10%. The cost of equity is 24%. The debt equity ratio of the firm will be maintained at 1 : 2. Calculate FCF.

Answer & Explanation:

Answer 2(b)(i) Calculate FCF Year 1 2 3 4 5 6 1. Asset value (beginning) 750 975 1267.50 1647.75 1944.35 2294.33 2. NOPAT 135 175.50 228.15 296.60 349.98 412.98 3. Net investment (% on opening Fixed Assets) 225 292.50 380.25 296.60 349.98 229.43 FCF (2-3) (90) (117) (152.1) - - 183.55 Growth rate (%) 30% 30% 30% 18% 18% 10%

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