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Solutions of Tests of
August 2015 Batch
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Solution of Test of
Business Valuations & EVA
[SFM – CA Final]
Conducted on 30th October 2015
[Solution is at the end with marking for self-assessment]
Q1
ABC Ltd. a market leader in printing industry is planning to diversify into defense
equipment business that has recently been partially opened up by GOI for private
sector. CEO of the company wants to get his company valued by leading
consultants. He has approached you with a request to take up valuation of his
company. He provides following data for the year ended 2009:
Share price
Outstanding Debt
Number of outstanding shares
PAT
Provision for Tax
Interest Expenses
Working Capital
Growth Rate of EBIT and Working Capital (from 2010 to 2014)
Growth Rate (beyond 2014)
Free Cash Flow (beyond 2014)
Rs.66 per share
Rs.1,925 lakhs
7.5 lakhs
Rs.63.7 lakhs
Rs.27.3 lakhs
Rs.154 lakhs
Rs.40 lakhs
8%
6%
Rs.191.65 lakhs
Capital expenditure is expected to be equally offset by depreciation in future and
debt is expected to decline by 30% in 2014. Cost of equity is 16 % up to 2014 and
14 % from 2015 and onwards.
Estimate value per equity share of the company and ascertain whether the ruling
MPS is undervalued as felt by the CEO. Assume 30% debt repayment is made at
the end of year 2014. Use FCFE Approach.
(20 Marks)
(Assessed answer papers shall be returned latest by 17th November 2015)
Solution prepared by
CA. Ashish Lalaji
Pinnacle Academy
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Q2
(a)
Gold Ltd. has provided the following data for the financial year ending 2014:
Liabilities
Amount
(Rs. in lakhs)
Share Capital
1,000
Reserves and Surplus
2,000
Long Term Debt
200
Trade Payables
50
3,250
Assets
Amount
(Rs. in lakhs)
Fixed Assets
3,000
Investments
150
Stock
50
Trade Receivables
50
3,250
Additional information provided is as follows:
Profit before interest and tax
Interest
Tax rate
Risk Free Rate
Market Rate
Beta Factor
Rs.1,000 lakhs
Rs.20 lakhs
35.875 %
10%
15%
1.4
Calculate EVA of Gold Ltd.
(6 Marks)
(b)
ABC Ltd. has divisions A, B and C. Division C has recently reported an annual
operating profit of Rs.20,20,00,000. The figure arrived at after charging Rs.3 crores
full cost of advertisement expenditure for launching a new product. However,
benefits of this expenditure is expected to last for 3 years. Cost of capital of division
C is 11 % and cost of debt is 8%. Net assets (invested capital) of division C as per
latest balance sheet is Rs.60 crores, but replacement cost of these assets is
estimated at Rs.84 crores. Compute EVA of division C making suitable adjustments
to historical accounting books.
(4 Marks)
(Assessed answer papers shall be returned latest by 17th November 2015)
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Solution of Test of Business Valuations & EVA
Conducted on 30th October 2015
Q1
Determination of EBIT for the year 2009:
Amount
(Rs.in lakhs)
63.7
27.3
91.0
154.0
245.0
PAT as given
Add: Provision for tax
PBT
Add: Interest expense
EBIT for the year 2009
Tax rate
27.3 / 91 i.e. 30%
(3 Marks)
Calculation of Additional Working Capital:
Year
2009
2010
2011
2012
2013
2014
Working Capital Working Capital
Additional
Required
Already Invested Working Capital
40
--43.2
40
3.20
46.66
43.2
3.46
50.39
46.66
3.73
54.42
50.39
4.03
58.77
54.42
4.35
(3 Marks)
Calculation of Continuing Value:
Continuing Value (at end of 2014) = 191.65 / 14% - 6% = Rs.2,395.625 lakhs
(2 Marks)
Determination of Value per Equity Share:
Year
EBIT
Interest
EBT
Tax
@
30%
PAT
Addnl
W.Cap
Repmnt
of Debt
FCFE
PVF
@
16%
PV
2010
2011
2012
2013
2014
264.60
285.77
308.63
333.32
359.99
154
154
154
154
154
110.60
131.77
154.63
179.32
205.99
33.18
39.53
46.39
53.80
61.80
77.42
92.23
108.24
125.52
144.19
3.20
3.46
3.73
4.03
4.35
--------577.50
74.22
88.77
104.51
121.49
(437.66)
.862
.743
.641
.552
.476
2014
Continuing Value
63.98
65.96
66.99
67.06
(208.33)
55.66
1,140.32
1,195.98
7.5
159.46
2,395.625
Value of Firm for Equity Shareholders
Number of equity shares
Value per equity share
(7 Marks for FCFE; 2 Marks for PV; 1 Marks for Value per share)
Conclusion:
The real worth of equity share is Rs.159.46; while it is trading on the stock exchange
at Rs.66 per share. Thus, the view of the CEO that the MPS is highly undervalued is
correct.
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
Pinnacle Academy
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Q2
(a)
Determination of TCE:
Share Capital
Reserves
Equity Funds
Long Term Debt
TCE
1,000
2,000
3,000
200
3,200
(2 Marks)
Determination of WACC:
Ke = 10 + 1.4 (15 – 10) = 17%
Interest Rate, I = 20 / 200 i.e. 10%
Ke = 10 (1 – 0.35875) = 6.4125%
WACC = 17 (30 / 32) + 6.4125 (2 / 32) = 16.34%
(2 Marks)
Determination of OPAT:
OPAT = 1,000 – 35.875% = Rs.641.25 lakhs
(1 Mark)
Determination of EVA:
EVA = 641.25 – (3,200 X 16.34%) = Rs.118.37 lakhs
(1 Mark)
(b)
Historical cost profit is adjusted as under:
Operating Profit
Add: Cost of unutilized advertisement expenditure
20,20,00,000
2,00,00,000
22,20,00,000
Invested capital at replacement cost is Rs.84 crores.
EVA = 22.2 – (84 X 11%) = Rs.12.96 crores
(4 Marks)
Solution prepared by
CA. Ashish Lalaji
Pinnacle Academy
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