Everest Manufacturing Industrial Limited started 4 years ago, is expected to grow at a higher rate of 4 years in the coming years and thereafter the growth rate will fall and stabilize at a lower level. The following inf
CS Professional · Valuations & Business Modelling · PYQS · December 2019
Everest Manufacturing Industrial Limited started 4 years ago, is expected to grow at a higher rate of 4 years in the coming years and thereafter the growth rate will fall and stabilize at a lower level. The following information has been made available to you for your analysis: Base Year (Year 0) Information (In Million ₹) Revenues 3000 Million EBIT 500 Million Capital Expenditure 350 Million Depreciation 250 Million Net Working Capital as a percentage of EBIT 25% Corporate tax rate (for all scenarios) 30% Paid-up Equity Capital (10 Face Value) 400 Million Market value of debt 1200 Million Inputs for the High Growth Phase Length of high growth phase 4 years Growth rate in revenues, depreciation 20% Net Working Capital as a percentage of EBIT 25% Cost of debt (pre-tax) 13% Debt-equity ratio 1:1 Risk-free rate 11% Market risk premium 7% Equity Beta 1.129 Inputs for the Stable Growth Phase Expected growth rate in revenues and EBIT 10% Capital expenditure are offset by depreciation Net Working Capital as a percentage of EBIT 25% Cost of debt (pre-tax) 12.14% Risk-free rate 10% Market risk premium 6% Equity Beta 1.0 Debt-equity ratio 2:3 With above information background, answer the following questions of the Management: What is the Value of the Firm?
Answer & Explanation:
Particulars 0 1 2 3 4 Terminal Year 1 Revenue 3000.00 3600 4320.00 5184.00 6220.80 6842.88 2 EBIT 500.00 600.00 720.00 864.00 1036.80 1140.48 3 EBIT(1-t) 350.00 420.00 504.00 604.80 725.76 798.34 4 Capital expenditure (less) depreciation 100.00 120.00 144.00 172.80 207.36 0.00 5 Net Working Capital 125.00 150.00 180.00 216.00 259.20 155.50 6 FCF(3-4-5) 125.00 150.00 180.00 216.00 259.20 642.84 The present value of the FCF during the explicit forecast period is: [150/(1.14)] + [180/(1.14) 2 ] + [216/(1.14) 3 ] + [259.20/(1.14) 4 ] = [150/1.14] + [180/1.300] + [216/1.482] + [259.20/1.689] = [131.58] + [138.50] + [145.79] + [153.47] = 569.3 million PV of FCF during High Growth period = 569.3 million The present value of the terminal value is: Terminal Value = [FCF 5/(WACC - g)] * [1/(1.14) 4 ] = [642.8/(0.13 - 0.10)] * [1/(1.14) 4 ] = [642.8/0.03] * [0.5921] = [21,426.67] * [0.5921] = 12,686.63 million PV of Terminal Value = 12,686.63 million The Value of the Firm is: = PV of FCF during high growth period + PV of Terminal Value = 569.3 million + 12,686.63 million = 13,255.6 million Value of the Firm = 13,255.6 million
Topics: Valuation
Related Questions in this Topic
- Arihant EdTech has started a web portal for online education and is at an early stage of business. It desires to value i...
- The risk free return is 6% and the expected return on market portfolio is 15%. If the required return on stock is 18%, w...
- The balance sheet of W Ltd. at the end of year zero is as follows: Liabilities Assets Shareholders funds ...
- The balance sheet of W Ltd. at the end of year zero is as follows: Liabilities Assets Shareholders funds ...
- The equity stock of Lex Ltd. is currently selling for ₹ 30 per share. The dividend expected next year is ₹ 2 per share. ...