DFM 15
BUSINESS ANALYSIS AND VALUATION
Assignment – I
Assignment Code: 2016DFM15B1 Last Date of Submission: 15th November 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 ? Merchant ? Printer ? 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: 2016DFM15B1 Last Date of Submission: 15th November 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
BUSINESS ANALYSIS AND VALUATION
Assignment – I
Assignment Code: 2016DFM15B1 Last Date of Submission: 15th November 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 ? Merchant ? Printer ? 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: 2016DFM15B1 Last Date of Submission: 15th November 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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