DFM 15
BUSINESS
ANALYSIS AND VALUATION
Assignment – I
Assignment
Code: 2016DFM15A1 Last Date of Submission: 26th
May 2016
Maximum
Marks: 100
Section-A
Each question
carries 25 Marks.
1. As a
‘Financial Analyst’ you are analyzing the performance of two companies, a
Biotechnology firm and a Mobile telephone manufacturer. You have collected the following information
about the two companies:
Company Actual
ROE Beta ROE of Peer Group Forecasted ROE
Biotech Firm 20.5% 1.2 16% 22%
Mobile Firm 12.5% 1.4 10% 10.5%
The risk free rate of return is 7%.
Evaluate the
performance of each of these companies relative to:
(i) the
required rate of return (6 marks)
(ii) the return on equity of the peer group (6 marks)
(iii) the forecasted return on equity (6 marks)
(iv) What
conclusion would you draw about the investment choices made by these firms?
(7
marks)
2. (a) How would
you value a firm? (5 marks)
(b) An
investor is holding 1000 shares of OMG Ltd.
Presently the rate of dividend being paid by the company is Rs.2 per
share and the share is being sold at Rs.25 per share in the market. However, several factors are likely to change
during the course of the year and expected budget, which are given below:
Existing Revised
Risk free rate 12% 10%
Market risk
premium 6% 4%
Beta value 1.4 1.25
Expected
growth rate 5% 9%
In view of the above factors you are required to suggest whether the
investor should buy, hold or sell the shares?
Give reason to justify and show your calculations clearly. (20 marks)
Section-B (50 Marks)
Case Study
You are the
finance manager of a paper mill (M Ltd.)
and have recently come across a particular type of paper, which is being sold at a
substantially lower rate (by another company – ABC Ltd.) than the price charged
by your own mill. The value chain for
one use of one tonne of such paper form ABC Ltd. is as follows:
ABC Ltd à Merchant à
Printer à Customer
ABC Ltd.
sells this particular paper to the merchant at the rate of Rs.1466 per
tonne. ABC Ltd. pays for the freight
which amounts to Rs.30 per tonne.
Average
returns and allowances amount to 4% of sales and approximately equal Rs.60 per
tonne.
The value
chain of your company, through which the paper reaches the ultimate customer,
is similar to the one of ABC Ltd.
However, your mill does not sell directly to the merchant, the latter
receiving the paper from a huge distribution centre maintained by your company
at Haryana. Shipment costs from the mill
to the Distribution Centre amount to Rs.11 per tonne while the operating costs
in the Distribution Centre have been estimated to be Rs.25 per tonne. The return on investments required by the
Distribution Centre for the investments made amount to an estimated Rs.58 per
tonne.
Assume that
the return on the investment expected by your company equals Rs.120 per tonne
of such paper.
You are
required to compare your company business model with ABC Ltd and compute the
cost (using above figures) the cost for this particular paper.
DFM
15
BUSINESS
ANALYSIS AND VALUATION
Assignment – II
Assignment
Code: 2016DFM15A2 Last
Date of Submission: 26th May 2016
Maximum Marks: 100
Section-A
Each
question carries 25 Marks.
1. The following
information is provided related to the acquiring company MM Ltd. and the target
company PP Ltd.:
|
Particulars
|
MM Ltd.
|
PP Ltd.
|
|
Earnings after tax (Rs.)
|
2000 lacs
|
400 lacs
|
|
Number of shares outstanding
|
200 lacs
|
100 lacs
|
|
P/E ratio (times)
|
10
|
5
|
Required:
(i) What is the swap ratio based on the current market price? (5 marks)
(ii) What is the EPS of MM Ltd. after acquisition? (5 marks)
(iii) What is the expected market price per
share of MM Ltd. after acquisition, assuming P/E ratio of MM Ltd. remains
unchanged? (5 marks)
(iv) Determine the market value of the merged firm. (5 marks)
(v) Calculate gain / loss for shareholders
of the two independent companies after acquisition. (5 marks)
2. Company A is
in the food processing business and has a market capitalization of Rs 100
million and a market beta of 1.5. A
considers merger with B, another company mainly producing computer software
that has a market capitalization of Rs 400 million and a market beta of
1.2.
The CEO of A argues that this will reduce their cost of
capital. The risk free rate of interest
is 5% and the market risk premium is 8%.
Both the companies and the merged company are 100% equity financed.
Required:
(i) What
is the beta of the merged company? (7 marks)
(ii) What
is the required rate of return on equity of the merged company? (7 marks)
(iii) What is the required return on a typical project in the
software division of the merged company?
Hence, comment on the reasoning of the CEO that merging has reduced A’s
cost of capital? (11 marks)
Section-B (50 Marks)
Case Study
Derive the fair
value of share of DEF Ltd. based on Balance Sheet of the company as on 31st
March 2015 and the information given below:
|
Liability
|
Amount (Rs.)
|
Assets
|
Amount (Rs.)
|
|
Equity Share Capital
(5 lac Shares @ Rs15 each)
|
75,00,000
|
Land
|
21,00,000
|
|
General Reserves
|
22,50,000
|
Building
|
34,50,000
|
|
Debentures (14%)
|
15,00,000
|
Plant & Machinery
|
42,00,000
|
|
Creditors
|
7,50,000
|
Debtors
|
9,00,000
|
|
Bank overdraft
|
6,00,000
|
Inventory
|
12,00,000
|
|
Provision for Taxation
|
1,50,000
|
Cash and Bank
|
3,00,000
|
|
|
|
Patents & Trademarks
|
4,50,000
|
|
|
|
Preliminary Expenses
|
1,50,000
|
|
Total
|
1,27,50,000
|
Total
|
1,27,50,000
|
The Profits of
the company for the past four years are as follows:
|
2012
|
18,00,000
|
|
2013
|
22,50,000
|
|
2014
|
31,50,000
|
|
2015
|
34,50,000
|
Every year the
company transfers 30% of its profits to the General Reserve. The average rate of return for the industry
is 27% of share value.
On 31st
March 2015 and independent Expert Vlauer assessed the value of assets as
follows:
|
Land
|
39,00,000
|
|
Buildings
|
60,00,000
|
|
Plant and Machinery
|
48,00,000
|
|
Debtors (Excluding
bad debts)
|
7,50,000
|
|
Patents and Trade
marks
|
3,00,000
|
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