A Private Limited Company has already in the business of manufacture and sale of imitation jewellery, is planning to take over the business of a similar Company (Target Company). Before take over the Management has appro

CS Professional · Valuations & Business Modelling · PYQS · June 2019
A Private Limited Company has already in the business of manufacture and sale of imitation jewellery, is planning to take over the business of a similar Company (Target Company). Before take over the Management has approached you as Valuation consultant, to suggest on future profitability and valuation. Following information is obtained from the existing Management: (i) The Target Company is doing business in 2 Segments i.e., wholesale and Retail. In Retail Segment there are two categories of products—budget and premium. (ii) In the Retail Segment, the estimated Annual sale in the next financial period for the budget category is ₹200 Lakh and premium category is ₹100 Lakh. The sales for budget category is expected to grow by 20% year on year. Premium category is expected to grow 10% year on year. (iii) In the Wholesale Segment Company is having Annual orders for ₹200 Lakh. (Credit period allowed to Debtors is 2 months). The demand in this segment is expected to grow by 25% year on year. (iv) Raw materials form 35% of the sale value for budget category and the Wholesale Segment, while they form 45% for the premium category. Creditors give one month credit for raw material purchased. (v) The variable processing cost is 25% of the sale value for budget category and 15% of the sale value for premium category while it is 25% of the sale value in the case of Wholesale Segment. (vi) Fixed costs are expected as follows: Rent ₹3,00,000 per month for processing and storage unit and ₹15,000 per month each for Ten showrooms. In third year 10% addition is expected for rent and thereafter there will be no change in rent for next 3 years. Administration overheads are expected at 10% of Sales for next 3 years. Rent of storage unit is to be apportioned between budget, premium and wholesale in their respective sales ratio and Rent for showroom is to be apportioned only to budget and premium categories in their respective sales ratio. (vii) 10% of raw material requirements for all categories/segments are to be maintained as inventory. (viii) The Equity Capital of the Company is ₹100 Lakh (10,00,000 Equity shares of ₹10 each) and the Company has a Term loan of ₹200 Lakh which is to be repaid in next 5 years with an interest of 10%, per annum (Interest is to be apportioned between budget, premium and wholesale in their respective sales ratio). Further, the Company has overdraft facility which carries an interest of 12% per annum, which will be availed in case of negative cash flows. (Interest on overdraft also to be apportioned between budget, premium and wholesale in their respective sales ratio). (ix) The Company has the policy of maintaining minimum Bank Balance of ₹25 Lakh. (x) The investment in plant and machinery is ₹200 Lakh and 15% per annum Depreciation is charged on straight line basis. Depreciation is to be apportioned between budget, premium and wholesale in their respective sales ratio. (xi) Company has Furniture, Fittings, Computers and other assets of ₹100 Lakh and it is depreciated at 10% per annum on straight line basis. Depreciation is to be apportioned between budget, premium and wholesale in their respective sales ratio. (xii) Tax rate to be assumed at 25%. (xiii) Discount Rate can be considered as 10% (Discount factors are as below): Year 1 | Year 2 | Year 3 0.9091 | 0.8264 | 0.7513 (xiv) The risk free rate of return is 6% and the Market risk premium is 9%. Industry Beta is 1.125. Beginning period debt and equity value can be considered for Debt Equity Ratio (Overdraft can be ignored; for debt equity ratio). Growth to perpetuity can be assumed at 3%. Based on the above information on Target Company, answer the following questions: Prepare projected Income Statement for 3 years (Category-wise and total)

Answer & Explanation:

Projected Income Statement for 3 Years Particulars Year 1 Year 2 Year 3 Budget Premium Wholesale Total Budget Premium Wholesale Total Budget Premium Wholesale Total Sales 200.00 100.00 200.00 500.00 240.00 110.00 250.00 600.00 288.00 121.00 312.50 721.50 Sales Ratio-Three Categories 40.00 20.00 40.00 40.00 18.33 41.67 39.92 16.77 43.31 Sales Ratio-Two Categories 66.67 33.33 68.57 31.43 70.42 29.58 Less: Raw Materials 70.00 45.00 70.00 185.00 84.00 49.50 87.50 221.00 100.80 54.45 109.38 264.63 Less: Processing cost 50.00 15.00 50.00 115.00 60.00 16.50 62.50 139.00 72.00 18.15 78.13 168.28 Gross Profit 80.00 40.00 80.00 200.00 96.00 44.00 100.00 240.00 115.20 48.40 125.00 288.60 Rent (Processing and Storage Unit) 14.40 7.20 14.40 36.00 14.40 6.60 15.00 36.00 15.81 6.64 17.15 39.60 Rent (show-rooms) 12.00 6.00 - 18.00 12.34 5.66 - 18.00 13.94 5.86 - 19.80 Administrative Overheads 20.00 10.00 20.00 50 24.00 11.00 25.00 60.00 28.80 12.10 31.25 72.15 Total Indirect Expenses 46.40 23.20 34.40 104.00 50.74 23.26 40.00 114.00 58.55 24.60 48.40 131.55 EBITDA 33.60 16.80 45.60 96.00 45.26 20.74 60.00 126.00 56.65 23.80 76.60 157.05 Less: Depreciation 16.00 8.00 16.00 40.00 16.00 7.33 16.67 40.00 15.97 6.71 17.33 40.00 EBIT 17.60 8.80 29.60 56.00 29.26 13.41 43.33 86.00 40.68 17.09 59.27 117.05 Less: Interest 9.82 4.91 9.82 24.56 6.40 2.93 6.67 16.00 4.79 2.01 5.20 12.00 EBT 7.78 3.89 19.78 31.44 22.86 10.48 36.67 70.00 35.89 15.08 54.08 105.05 Tax (25%) 1.95 0.97 4.95 7.86 5.72 2.62 9.17 17.50 8.97 3.77 13.52 26.26 PAT 5.83 2.92 14.83 23.58 17.14 7.86 27.50 52.50 26.92 11.31 40.56 78.79

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