Valuation is the estimation of an asset ’s value based on variables perceived to be related to

future investment returns, or based on comparisons with closely similar assets.

Reasons for Valuation

Stock selection
Merger & Acquisition
IPO
Share based payments

Valuation Process

1 Understanding the Business

Fundamental Analysis
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2 Forecasting Financials

3 Selection of Valuation Model

Consistent with the characteristics of the company being valued.
Appropriate given the availability and quality of the data.
Consistent with the analyst’s valuation purpose and perspective.

4 Appying Valuation model to forecasts and conclusion

5 Valuation Report
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y/Modules/Module%203_Fundamental%20Analysis.pdf

apital-reduction-scheme/Valuation-report.pdf

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Types of Value

Historical Value Cost Approach

Realisable Value Amount you get if you sell an asset, NAV approach, Also called liquidation val

Replacement Value/Current Value HR or Brand Valuation

Economic Value/Present Value

Net Asset Vaue Method

Conservative method
Liquidation approach
Valuation of Equity

Assets at Realisable value

(-) External Liabilities (CL+Debt+pref) Note: - Equity should not be deducted
Net Asset Value

NAV /- share Net asset value

No. of shares

Dividend Discount Model

Economic/Present value concept
Benefit -> Dividend
Value of Equity (Ve)
K -> ke

1. Zero growth model

g=0
Ve =D/Ke

2. Constant growth model

one constant growth rate
Ve = D1/(Ke - g)

3. 2 stage model
Two growth rate
Ve = Vhgp + Vsgp

High growth period ->Hgp-> g1 Stable growth period ->Sgp-> g2

 =-finite =-Perpetual
D6 = D5 * (1+ g2)
Year Dividend PVF @ ke PV Terminal Value =V5=
1 D1 = Do(1+g1) PVF 1 D6
2 D2 = D1(1+g1) PVF 2 ke - g2
3 D3
4 D4
5 D5
Vhgp =sum Vsgp = Terminal Value * PVF 5

Stable growth period

->Multiples Approach

P/E at 5th year= 10

Earning 5 th year = 100
Terminal Value =
Price 5th year = 1000

Vsgp = Terminal Value * PVF 5

4. H Model of approximation
Linear declining growth rate + two stage model

Ve = Do*(1+g2) + Do*(HGP/2)*(g1-g2)
ke-g2 ke-g2

g1-> HGP growth rate

g2-> SGP growth rate

HGP-> No. of yrs of high growth period

Limitation of H model: Difference in actual value and approximate increases if

HGP is long
difference between g1 & g2

FCFF Valuation
Free Cash Flow to Firm
Ability of a company to generate cash more than investment exp
Economic/Present value concept
Benefit -> Cash flow
Valuation of firm (Business) -> Value of Debt & Equity
K -> WACC
 FCF = Cash generated - Invest Exp FCFF = PAT + I(1-t) + Dep

FCFF = PAT + Non cash Exp (Dep, Ammort, w/off) - Capex - Change in WC + Int*(1-t)

FCFF= EBIT(1-t) + Non Cash Exp - Capex - Change in W.C

FCF = CFO - Capex

*Change in WC -> Increase in WC -> Invest -> Outflow

1. Zero growth model

g=0
Vf =FCFFo/Kc

2. Constant growth model

one constant growth rate
Vf = FCFF1/Kc - g

3. 2 stage model
Two growth rate
Ve = Vhgp + Vsgp

High growth period ->Hgp-> g1 Stable growth period

=-finite ->Multiples Approach

Year Dividend PVF @ kc PV EV/EBIT at 5th year= 10

FCFF1 =
1 FCFFo(1+g PVF 1 EBIT 5 th year = 100
FCFF2 =
2 FCFF3(1+g PVF 2 Terminal Value =
3 FCFF3 Price 5th year = 1000
4 FCFF4
5 FCFF5
Vhgp =sum Vsgp = Terminal Value * PVF 5

Stable growth period ->Sgp-> g2

=-Perpetual
FCFF6 = FCFF5 * (1+ g2)
Terminal Value =V5=
FCFF6
kc - g

Vsgp = Terminal Value * PVF 5

FCFE Valuation
Free Cash Flow to Equity
Ability of a company to generate cash more than investment exp after accounting for debt financing
Economic/Present value concept
Benefit -> Cash flow
Valuation of Equity
k -> Ke

FCFE = FCFF - I (1-t) + Debt raised/issued - Debt paid FCFE = PAT + Dep - CAPEX - Inc in W

FCFE = PAT + Non cash Exp (Dep, Ammort, w/off) - Capex - Change in WC +/- Net Borrowings

FCFE= EBIT(1-t) + Non Cash Exp - Capex - Change in W.C - I(1-t) +/- Net borrowings

FCFE = CFO - I(1-t) - Capex +/- Net borrowings

1. Zero growth model

g=0
Ve =FCFE/Ke

2. Constant growth model

one constant growth rate
Ve = FCFE 1/Ke - g

3. 2 stage model
Two growth rate
Ve = Vhgp + Vsgp

High growth period ->Hgp-> g1

=-finite

Year Dividend PVF @ ke PV

FCFE1 =
1 FCFEo(1+g) PVF 1
FCFE2 =
2 FCFE3(1+g PVF 2
3 FCFE3
4 FCFE4
5 FCFE5
Vhgp =sum

Stable growth period ->Sgp-> g2 Stable growth period

 =-Perpetual ->Multiples Approach
FCFE6 = FCFE5 * (1+ g2)
Terminal Value =V5= P/E at 5th year= 10
FCFE6 Earning 5 th year = 100
ke - g Terminal Value =
Price 5th year = 1000

Vsgp = Terminal Value * PVF 5 Vsgp = Terminal Value * PVF 5

Residual Income Valuation

Ability of a company to generate returns more than shareholders expectations
Present Value/Economic Value
Benefit -> Residual Income
Valuation of Equity
k -> Ke

Eq Residual Income = Return generated - Return Expected

= PAT- Equity Cost
=(Op BV * Return on Equity) - (Op BV * Ke)
=Op BV *(ROE-Ke)

1. Zero growth model

Ve = RI + BV o
ke

2. Constant growth model

Constant Growth model

Ve = RI 1 + BV o
ke -g

3. 2 stage model
Two stage model
Ve = Vhgp + Vsgp + Bvo

High growth period ->Hgp-> g1

=-finite

Year Cash Flows PVF @ ke PV

 1 RI 1 PVF 1
2 RI 2 PVF 2
3 RI 3
4 RI 4
5 RI 5
Vhgp =sum

Stable growth period ->Sgp-> g2 Stable growth period

=-Perpetual ->Multiples Approach
RI 6 = RI 5 * (1+ g2)
Terminal Value =V5= P/E at 5th year= 10
RI 6 Earning 5 th year = 100
ke - g Terminal Value =
Price 5th year = (1000 - Bv5)

Vsgp = Terminal Value * PVF 5 Vsgp = Terminal Value * PVF 5

Relative Valuation (Comparable valuation, Comps approach)

Valuation using multiples

multiples -> ratios with a market price related variable

Multiples
-> Price based multiples
P/E, P/S, P/BV
Valuation of Equity

-> Enterprise Value based multiples ->

EV/EBIT, EV/EBITDA, EV/CFO, EV/Sales, EV/Assets
Valuation of firm

Enterprise Value
-> Value of firm
-> Value of funds deployed in the business
Eq at MV x
(+) Debt at MV x
(+) Pref at MV x
(-) Cash & Cash Eq x
EV x

1. Select comparables
2. Select the multiples
3. Calculate the multiples for the comparables
4. Avg the multiples -> industry avg
5. Multiply the industry avg with the target co. variable to get value as per each multiple
Also called liquidation value

Linear declining growth rate

HGP g rate decreases in a manner to reach the stable g rate
FCFF = PAT + I(1-t) + Dep - CAPEX - Inc in WC
bt financing

T + Dep - CAPEX - Inc in WC + Debt Raised - Debt Repaid

 Module 3: Valuation

Dividend Discount Model

2 Consolidated Edison is the electric utility that supplies power to residences and business in
New York city. It is a quasi-monopoly whose process and profits are regulated by the state of
New York. the entity paid dividends per share of $2.22 in 2010 when its EPS was $3.47. The
company has a risk-free rate of 3.5%, the risk premium of 5% in 2010, beta of 0.8 whereas the
growth rate is estimated to be 3.53% p.a. Ascertain the value of the company based on Dividend
Model. The stock was trading at $ 42 per share at the time of this valuation.

3 Afron Mines is a profitable company that is expected to pay a $4.25 dividend next year.
Because of its depleting mining properties, the best estimate is that dividends will decline
forever at a rate of 4% p.a. The required rate of return on Afron stock is 9%. What is the value
of Afron shares?

4 Procter and Gamble (P&G) is one of the leading global consumer product companies, owning
some of the most valuable brands in the world, including Gillette razors, tide detergent, Crest
toothpaste and Vicks cough medicine. P&G has a long history of paying dividends. Due to its
business expansion plans the company is going to be provided with a platform to deliver high
growth at least for the next five years. During the high growth period, the dividends will grow
at 10% and after that it would grow at the risk free rate. The company currently has reported $
12,736 million in earnings for 2010 and paid out 49.74% of the earnings as dividends, on a per
share basis earnings were $ 3.82 and dividends were $ 1.92. The beta applicable to the company
is 0.9 which reflects the beta for large consumer product companies. The risk-free rate is 3.5%
and the market premium is 5%. Compute the value.

5 Casey Hyunh is trying to value the stock of Resources Limited. The projections for the next
four years are based on the following assumptions.
Sales will be $ 300 million in year 1. Sales will grow at 15 percent in years 2 and 3 and at 10
percent in year 4.
Operating profits (EBIT) will be 17 percent of sales in each year.
Interest expense will be $ 10 million per year.
Income tax rate is 30 percent.
Earnings retention ratio would stay at 0.60.
The dividend growth rate will be constant from year 4 forward and this final growth rate will
be 200 basis points less than the growth rate from year 3 to year 4. The company has 10 million
shares outstanding. Hyunh has estimated the required return on Resources ’ stock to be 13
percent. Estimate the value per share as per Dividend discount model.
6 Françoise Delacour, a portfolio manager of a U.S.-based diversified global equity portfolio, is
researching the valuation of Vinci SA (NYSE Euronext: DG). Vinci is the world’s largest
construction company, operating chiefly in France (approximately two-thirds of revenue) and
the rest of Europe (approximately one-quarter of revenue). Having decided to compute the Hmodel
value estimate for DG, Delacour gathers the following facts and forecasts: The share
price as of mid-August 2007 was €57. The current dividend is €1.37. The initial dividend
growth rate is 24 percent, declining linearly during a 12-year period to a final and perpetual
growth rate of 6 percent. Delacour estimates DG’s required rate of return on equity as 10
percent. Using the H-model and the information given, estimate the per-share value of DG.
Compare the value from H-model with the actual value from 2 stage model.

7 An analyst is preparing a forecast of dividends for Hoshino Distributors for the next five years.
He uses the following assumptions:
Sales are $100 million in year 1. They grow by 20 percent in year 2, 15 percent in year 3, and
10 percent in years 4 and 5. There after will stabilise at 8% p.a.
Operating profits (earnings before interest and taxes, or EBIT) are 20 percent of sales in years
1 and 2, 18 percent of sales in year 3, and 16 percent of sales in years 4 and 5.
Interest expenses are 10 percent of total debt for the current year.
The income tax rate is 40 percent.
Hoshino pays out 20 percent of earnings in dividends in years 1 and 2, 30 percent in year 3, 40
percent in year 4, and 50 percent in year 5.
Retained earnings are added to equity in the next year.
Total assets are 80 percent of the current year’s sales in all years. In year 1, debt is $40 million
and shareholders’ equity is $40 million.
Debt equals total assets minus shareholders’ equity. Shareholders’ equity will equal the
previous year’s shareholders’ equity plus the addition to retained earnings from the previous
year.
Hoshino has 4 million shares outstanding. The required return on equity is 15 percent. The
analyst wants to estimate the current value per share of Hoshino.

8 Assorted Fund, a UK - based globally diversified equity mutual fund, is considering adding
Talisman Energy Inc. (Toronto Stock Exchange: TLM) to its portfolio. Talisman is an
independent upstream oil and gas company headquartered in Calgary, Canada. It is one of the
largest oil and gas companies in Canada and has operations in several countries. Brian Dobson,
an analyst at the mutual fund, has been assigned the task of estimating a fair value of Talisman.
Dobson is aware of several approaches that could be used for this purpose.
After carefully considering the characteristics of the company and its competitors, he believes
the company will have extraordinary growth for the next few years and normal growth
thereafter. He has therefore concluded that a two - stage DDM is the most appropriate for
valuing the stock. The total dividends during 2008 is C $ 0.175, respectively.
Dobson believes that the growth rate will be 14 percent in the next year. He has estimated that
the first stage will include the next eight years. Dobson is using the CAPM to estimate the
 required return on equity for Talisman. He has estimated that the beta of Talisman is 0.84. The
Canadian risk - free rate, as measured by the annual yield on the 10 - year government bond,
is 4.1 percent. The equity risk premium for the Canadian market is estimated at 5.5 percent.
Dobson is doing the analysis in January 2008 and the stock price at that time is C $ 17. Dobson
realizes that even within the two - stage DDM, there could be some variations in the approach.
He would like to explore how these variations affect the valuation of the stock. Specifically, he
wants to estimate the value of the stock for each of the following approaches separately.
I. The dividend growth rate will be 14 percent throughout the first stage of eight years.
The dividend growth rate thereafter will be 7 percent.

II. Instead of using the estimated stable growth rate of 7 percent in the second stage,
Dobson wants to use his estimate that eight years later Talisman ’ s stock will be
worth 17 times its earnings per share (trailing P/E of 17). He expects that the
earnings retention ratio at that time will be 0.70.

III. In contrast to the first approach in which the growth rate declines abruptly from 14
percent in the eighth year to 7 percent in the ninth, the growth rate would decline
linearly from 14 percent in the first year to 7 percent in the ninth.

 What is the terminal value of the stock based on the first approach?
 In the first approach, what proportion of the total value of the stock is represented by
the value of the second stage?
 What is the terminal value of the stock based on the second approach (earnings
multiple)?
 What is the current value of the stock based on the second approach?
 Based on the third approach (the H - model), the stock is over values or undervalued?

FCFE Model & FCFF Model

9 Disney has provided you with the following details. Compute the FCFE & FCFF for the
company. (Tax rate – 30%)
Year EBIT
2010 3963
2009 3307

What does it mean if FCFF is negative

What does it mean if FCFF is negative but FCFE is positive?

What does it mean if FCFE is negative?

Can FCFE be negative if FCFF positive

10 Max Ltd. wants to understand the value for 2016 through FCFF & FCFE method. It provides
you with the following details.
Statement of Profit & loss (in lakhs)
Particulars 2016
Sales 300
COGS 120
Selling & Distribution Exp 35
Depreciation 50
EBIT 95
Interest 15
PBT 80
Tax 24
Profit for the year 56

Balance sheet
Particulars 2016
Cash 10
Accounts Receivable 30
Inventory 40
Current Assets 80

Gross Property , Plant & Equipment 400

(-) Accumulated Depreciation -190
Total Assets 290

Accounts Payable 20
Short term Debt 20
Current liabilities 40
Long term Debt 114
Reserves 86
Share Capital 50
Total Liabilities 290

11 Using the Information given below (in lakhs), calculate the FCFF & FCFE value of the company for all
the years. Assume tax rate=30%
 Particulars 2010
Cash flow from operations
EBIT 97.52
(+) Depreciation 45
Increase in Accounts receivable -100
Increase in Inventory -6
Increase in accounts payable 50

Cash Paid for Taxes -41.8

Cash flow from operation 44.72

Cash flow from Investing activity

Purchase of PPE 0

Cash flow from financing activities

Borrowing 22.4
Interest -15.68

Opening Cash Balance 0

Closing Cash Balance 51.44

12 Welch Corporation uses bond, preferred stock, and common stock financing. The market
value of each of these sources of financing and the before-tax required rates of return
for each are given below

Capital Structure:-
Value (in mil)
Bonds 400
Preferred stock 100
Common stock 500

Other Information (in mil):-

• Net income available to common shareholders = $110.
• Interest expenses = $32.
• Preferred dividends = $8.
 • Depreciation = $40.
• Investment in fixed capital = $70.
• Investment in working capital = $20.
• Net borrowing = $25.
• Tax rate = 30 percent.
• Stable growth rate of FCFF = 4.0 percent.
• Stable growth rate of FCFE = 5.4 percent.

Calculate value of company and equity as per FCFF

Calculate value of equity as per FCFE

13 In 2010, Coca Cola reported EBIT of $16,670 million, net income of $11,809 million, capital expenditures
of $2,215 million, depreciation of $1,443 million and an increase in working capital of $335 million.
Incorporating the fact that Coca Cola raised $150 million more in debt than it repaid and the
book value of its equity is 25,346. The Beta applicable to the company is 0.9, Risk free rate is
3.5% and premium is 5.5%. The high growth period for the company will be for 3 years.
The growth rate for FCFF will be 5% p.a and for FCFE will be 3.8% p.a
Find the value of firm based on FCFF equity based on FCFE approach.
Tax rate is 30%
14 Data related to Nestle Ltd is given below:
Current net income= 5763 million
Current capital spending= 5058 million
Current Depreciation= 3330 million
Change in working capital= 368 million
Opening Book value of equity= 25078 million
Net debt issues= 272 million
No. of shares= 38.85 million
10-year bond rate is 4%. Beta is 0.85 and market risk premium is 5.26%. The firm will be in
high growth phase for 10 years after which there will be stable growth. If the stock
is trading at 3390 currently, comment on whether the stock is undervalued or overvalued using FCFE

15 Uwe Henschel is doing a valuation of TechnoSchaft on the basis of the following

information:
• Year 0 sales per share = €25.
• Sales growth rate = 20 percent annually for three years and 6 percent annually thereafter.
• Net profit margin = 10 percent forever.
• Net investment in fixed capital (net of depreciation) = 50 percent of the sales increase.
• Annual increase in working capital = 20 percent of the sales increase.
• Debt financing = 40 percent of the net investments in capital equipment and working
capital.
• Interest coverage ratio (EBIT/Interest) is expected to be 5 throughout
Cost of equity can be assumed to be 12% and WACC can be assumed to 15%
 Tax rate to be assumed as 30%
Calculate value of equity using FCFE and value of firm using FCFF

16 Exotica Corporation is expected to grow at a higher rate for 5 years; thereafter the growth rate
will fall and stabilize at a lower level. The following information is available.
Particulars Rs. in millions
Revenues 4000
EBIT 500
Capex 300
Depreciation 200
Corporate tax rate 40%
Paid up equity share capital (Rs. 10) 300
Market value of debt 1250
Input for the high growth rate
Length for forecast period 5 years
Growth rate in revenues, Dep, EBIT and Capex 10%
Working Capital as a % of revenue 30%
Cost of Debt (pre-tax) 15%
Debt Equity Ratio 1:1
Risk Free rate 13%
Market Risk premium 6%
Equity beta 1.333
 Input for the Stable growth period
Expected Growth rate in revenues and EBIT 6%
Capital Expenditure are offset by depreciation
Working Capital as a % of revenue 30%
Cost of Debt (Pre-tax) 12%
Debt Equity Ratio 2:3
Risk Free rate 12%
Market Risk premium 7%
Equity beta 1

Calculate the value of the firm & equity using FCFF in accordance with information given above
What will be the value of the company as per FCFF if EV/Revenue exit multiple of 1.5 is used

17 You have been asked by the owner of a small firm that produces and sells computer software
to estimate the value of his firm. The firm had revenues of $20 million in the most recent year, on which it
earnings before interest and taxes of $2 million. The firm had debt outstanding of $10 million, on which
pre-tax interest expenses amounted to $1 million. The book value of equity is $10 million.
The average beta of publicly traded firms that are in the same business is 1.30, and the
average debt-equity ratio is 0.2 (based upon the market value of equity). The market value of equity of thes
firms is, on average, three times the book value of equity. All firms face a 40% tax rate. Capital expenditure
amounted to $1 million in the most recent year, and were twice the depreciation charge in that year.
Both items are expected to grow at the same rate as revenues for the next five years, and to offset each othe
The revenues of this firm are expected to grow 20% a year for the next five years, and 5% after that.
Net income is expected to increase 25% a year for the next five years, and 8% after that. The treasury bond
Estimate the value of equity using firm and equity cash flow approach
 Residual Valuation

18 David Smith is evaluating the expected residual income as of the end of September 2007 of
Carrefour SA (NYSE Euronext Paris: FR0000120172), a France - based operator of
hypermarkets and other store formats in Europe, the Americas, and Asia. Beta is 0.72, a 10 -
year government bond yield of 4.3 percent, and an estimated equity risk premium of 7 percent.
Smith obtains the following data:
Current market price- € 48.83
Book value per share as of 31 December 2006- € 13.46
Consensus annual earnings estimates
FY 2007 (ending December) € 2.71
FY 2008 € 2.86
Annualized dividend per share forecast
FY 2007 € 1.03
FY 2008 € 1.06
What is the forecast residual income for fiscal years ended December 2007 and December
2008?

19 Joseph Yoh is evaluating a purchase of Canon, Inc. (NYSE: CAJ). Current book value per
share is $ 18.81, and the current price per share is $ 51.90. Yoh expects long - term ROE to be
16 percent and long - term growth to be 8 percent. Assuming a cost of equity of 11 percent,
what is the value of Canon stock calculated using a single - stage residual income model?
20 Bugg Properties ’ expected EPS is $ 2.00, $ 2.50, and $ 4.00 for the next three years. Analysts
expect that Bugg will pay dividends of $ 1.00, $ 1.25, and $ 12.25 for the three years. The last
dividend is anticipated to be a liquidating dividend; analysts expect Bugg will cease operations
after year 3. Bugg ’ s current book value is $ 6.00 per share, and its required rate of return on
equity is 10 percent. 1. Calculate per - share book value and residual income for the next three
years. 2. Estimate the stock’s value using the residual income model

21 Shunichi Kobayashi is valuing United Parcel Service (NYSE: UPS). Kobayashi has made the
following assumptions:
Book value per share is estimated at $ 9.62 on 31 December 2007.
EPS will be 22 percent of the beginning book value per share for the next eight years.
Cash dividends paid will be 30 percent of EPS.
At the end of the eight - year period, the market price per share will be three times the book
value per share. The beta for UPS is 0.60, the risk - free rate is 5.00 percent, and the equity risk
premium is 5.50 percent. The current market price of UPS is $ 59.38, which indicates a current
P/B of 6.2.
A. Prepare a table that shows the beginning and ending book values, net income, and cash
dividends annually for the eight - year period. B.
B. Estimate the residual income and the present value of residual income for the eight
years.
C. Estimate the value per share of UPS stock using the residual income model.
D. Estimate the value per share of UPS stock using the dividend discount model. How
does this value compare with the estimate from the residual income model?
 Relative Valuation

22 Find the value of Dell using HP & Gateway as comparables

Sales
HP 45226
Gateway 6080
Dell 31168

23 You wish to evaluate Diamond Offshore Drilling using the relative valuation technique.
Information about Diamond and some of its competitors are listed below.
Company Ticker
Diamond DO
Transocean RIG
Global Santa Fe GSF
Nabors NBR
Ensco ESV
Rowan RDC
Helmerich & Payne HP
Key Energy KEG
What is your estimate of Diamond’s value? Does Diamond appear to be overpriced, underpriced,
or properly priced on this basis?
24 The following information is provided to you for the purpose of valuation
Balance sheet
Particulars Amt. (000)
Cash 4060
Accounts Receivable 1700
Inventory 1197
Other Current Assets 383
Total Current Assets 7340

Property , Plant & Equipment 3803

Intangible Assets 2610
Other Non-current Assets 174
Total Assets 13927

Accounts Payable 2037

Accrued Expenses 959
Total Current liabilities 2996

Long term Debt 2013

Other Long term liabilities 495

Share Capital (238000 shares of 10 each) 2380

Reserves 6043
Total Liabilities 13927

Details of Income
Particulars Amt. (000)
Net Income 1990
Interest 41
Income Tax 264
Depreciation 1270
The share price of the company is 63.06 per share. Calculate EV/EBITDA
25
You wish to estimate the value of a stock using the Comps method. Selected financial
information for the company is shown below.
Company Information
Earnings per Share $5
EBITDA $2.2 million
Market Value of Long-Term Debt $10 million
Market Value of Preferred Stock $8 million
Cash $2 million
Number of Shares Outstanding 50,000

The industry average P/E ratio is 18.5 and the industry average EV/EBITDA ratio is 9.7.
a) Using earnings as a basis, what is your best estimate of the value of a share of the
company’s stock?
b) Using EBITDA as a basis, what is your best estimate of the value of a share of the
company’s stock?

Net Asset Value/Liquidation Value

26 M ltd submits the following information as on 31st March ,2010

Fixed Assets Rs. 15,00,000
Current Assets Rs. 16,00,000
Patent rights Rs. 250,000
Investments Rs. 100,000
External Liabilities Rs. 400,000
Capital comprises of 25,000 equity shares of Rs. 100 each fully paid up. There is no
realizable value for patents. Ascertain the value per share.

27 Following is the balance sheet of RK Ltd. as on 31st March,2010.

Liabilities Rs.
200,000 equity shares of 10 each 20,00,000
Reserves 30,00,000
Long term loan 10,00,000
Current liabilities 5,40,000

Total 134,00,000

Calculate the Net Asset Value per share of RK ltd. using the details given below:
a. Goodwill is valued at Rs. 10,00,000. Machinery at Rs. 49,50,000, Building at Rs.
20,00,000 & Vehicles at Rs. 50,000
b. Current Assets & Current Liabilities are to be taken at Book value.
c. Shares of T Ltd. are to be valued on the basis of Net assets method

Balance Sheet of T Ltd. as on 31.3.2010

Liabilities Rs.
5000 Equity shares of Rs. 100 each 500,000
Reserves 800,000
Current Liabilities 700,000

Total 20,00,000
Fixed assets of T ltd. revalued at Rs. 12,00,000 and current liabilities at Rs. 600,000
and business in
ed by the state of
S was $3.47. The
of 0.8 whereas the
y based on Dividend

d next year.
s will decline
What is the value

ompanies, owning
e detergent, Crest
idends. Due to its
m to deliver high
vidends will grow
ntly has reported $
dividends, on a per
able to the company
k-free rate is 3.5%

ons for the next

2 and 3 and at 10

growth rate will

pany has 10 million
stock to be 13
 quity portfolio, is
world’s largest
s of revenue) and
o compute the Hmodel

itial dividend
al and perpetual
equity as 10
e value of DG.

the next five years.

ent in year 3, and

nt of sales in years

ercent in year 3, 40

debt is $40 million

ll equal the
om the previous

5 percent. The

sidering adding

da. It is one of the

ries. Brian Dobson,
value of Talisman.

titors, he believes

ppropriate for

has estimated that

o estimate the
 isman is 0.84. The
overnment bond,
d at 5.5 percent.
e is C $ 17. Dobson
ns in the approach.
ck. Specifically, he
s separately.

resented by

ndervalued?

FCFF for the

Dep Capex Change in W.C Debt issued Debt repaid Interest

1713 4693 308 1190 1371 100
1631 1940 -109 1750 1617 50
ethod. It provides

2015
250
100
30
40
80
10
70
21
49

2015
5
15
30
50

300
-140
210

20
10
30
100
30
50
210

value of the company for all

 2011 2012

107.28 118
49.35 54.45
-10 -11
-6.6 -7.26
5 5.5

-45.98 -50.57
99.05 109.12

-50 -55

24.64 27.1
-17.25 -18.97

51.44 107.88
107.88 170.13

. The market

Cost
8.00%
8.00%
12.00%
 9 million, capital expenditures
g capital of $335 million.
it repaid and the
9, Risk free rate is
e for 3 years.
e firm will be in

r overvalued using FCFE

ally thereafter.

es increase.
er the growth rate
ormation given above
tiple of 1.5 is used

omputer software
e most recent year, on which it made
ng of $10 million, on which
s $10 million.
30, and the
e market value of equity of these
0% tax rate. Capital expenditures
ation charge in that year.
e years, and to offset each other in steady state.
years, and 5% after that.
% after that. The treasury bond rate is 7%.
tember 2007 of

ta is 0.72, a 10 -
mium of 7 percent.

and December

book value per

g - term ROE to be
y of 11 percent,
come model?
ee years. Analysts
ree years. The last
ll cease operations
rate of return on
for the next three

ashi has made the

times the book

and the equity risk
indicates a current

ome, and cash

 Book value Market Value
NI (Earnings)
Equity (Price)
624 13953 32963
85 1565 1944
1246 4694 ?

n technique.

Earnings per
Price Sales per Share
Share
$20.49 $1.31 $5.32
$20.95 $0.86 $8.77
$24.13 $1.50 $8.60
$36.50 $2.18 $11.42
$29.19 $1.50 $4.87
$21.42 $0.80 $6.41
$28.80 $2.84 $14.13
$8.15 $0.38 $7.49
rpriced, underpriced,
A ratio is 9.7.
Assets Rs.
Goodwill 1,00,000
Building 9,00,000
Machinery 40,00,000
Vehicles 1,00,000
Shares in T ltd.
(3000 equity
3,00,000
shares of 100
each)
Current Assets 11,40,000
Total 134,00,000

Assets Rs.
Fixed Assets 900,000
Current Assets 11,00,000

Total 20,00,000