DFM 15
BUSINESS ANALYSIS AND VALUATION
Assignment-I
Assignment Code: 2017DFM15B1 Last Date of Submission: 15th November 2017
Maximum Marks: 100
Attempt all the questions.
SECTION – A (25 marks for each question)
1. A customer pays $1,000 in advance for a service agreement. What are the financial statement effects of this transaction if (a) revenue is recognized at receipt of cash, and (b) revenue is recognized at delivery of the product? What forecasts, if any, do you have to make to complete the recording of this transaction? What factors would determine which of these two approaches is appropriate? As a financial analyst, what questions would you raise with the firm’s CFO?
2. True Value Ltd is planning to raise funds through issue of common stock for the first time. However, the management of the company is not sure about the value of the company and therefore it attempts to study similar companies in the same line which are comparable to True Value in most of the aspects. True Value feels that 50% weightage should be given to earnings in the valuation process; sales and book value may be given equal weightage. From the following information, compute the value of True Value Ltd. using the comparable firms approach:
Company True Value Ltd. Jewel Value Ltd. Real Value Ltd. Unique Value Ltd.
Rs (crore) Rs (crore) Rs (crore) Rs (crore)
Sales 250 190 210 270
Profit After Tax 40 30 44 50
Book Value 100 96 110 128
Market Value 230 290 440
.
Section-B (50 Marks)
Case Study
The following information is provided relating to the acquiring company (Efficient Ltd.) and the target company (Healthy Ltd.):
Particulars Efficient Ltd. Healthy Ltd.
Number of shares ( Face value Rs.10 each) Rs. 10 lakhs Rs. 7.5 lakhs
Market capitalization Rs. 500 lakhs Rs. 750 lakhs
P/E ratio (times) 10 5
Reserves and surplus Rs. 300 lakhs Rs. 165 lakhs
Promoter’s holding (number of shares) 4.75 lakhs 5 lakhs
Board of Directors of both the companies have decided to give a fair deal to the shareholders and accordingly for swap ratio the weights are decided as 40%, 25 % and 35% respectively for earnings, book value and market price of share of each company.
Case Questions:
a) Calculate the swap ratio and also calculate the promoter’s holding % after acquisition. [15]
b) What is EPS (earning per share) of Efficient Ltd. after acquisition of Healthy Ltd.? [12]
c) What is the expected market price per share and market capitalization of Efficient Ltd. after acquisition, assuming P/E ratio of firm Efficient Ltd. remains unchanged? [13]
d) Calculate the free float market capitalization of the merger firm. [10]
DFM 15
BUSINESS ANALYSIS AND VALUATION
Assignment-II
Assignment Code: 2017DFM15B2 Last Date of Submission: 15th November 2017
Maximum Marks: 100
Attempt all the questions.
SECTION – A (25 marks for each question)
1. a) What is a financial bond? List and explain the methods of bond valuation and
importance of YTM (yield to maturity). [3+10]
b) Briefly explain the various methods/ approaches undertaken to assess the value of the
target firm, as part of financial evaluation of a merger & acquisition proposal. [12]
2. a) One of the fastest growing industries in the last twenty years is the memory chip
industry, which supplies memory chips for personal computers and other electronic devices. Yet the average profitability for this industry has been very low. Using the industry analysis framework, list all the potential factors that might explain this apparent contradiction. [10]
b) ABC Ltd. Requires an initial investment of Rs 12 lakh for its new store for which Rs 4 lakh
would come from borrowing at an interest rate of 8%. The interest is paid for 5 years and the entire principal with interest is repaid at the end of the sixth year. The interest expenses are tax deductible at a rate of 36%, but the principal payments are not. The cash flows to the firm are expected to be Rs 80000 initially. These cash flows are expected to grow at a rate of 30% for the first four years and at 75% for the fifth year. Estimate the free cash flow to equity. [15]
Section-B (50 Marks)
Case Study
Emphasis Ltd has prepared a strategic roadmap for the next 10 years to boost its growth. The strategic plan has proposed inorganic growth and thus the firm has identified Metamorphosis Ltd as a target firm for horizontal merger. Such a merger would increase the market share of Emphasis Ltd from 32% at present to 54%.
The cash flows of Emphasis Ltd are expected to grow at 27.5% for the next 10 years on account of merger that is significantly above the current growth of 9.5%. The growth rate after 10 years is likely to normalize and come down to 12% level. In case Emphasis Ltd does not merge with Metamorphosis Ltd, its growth rate beyond year 10 is expected to come down to 6.5%. The projected cash flow for Emphasis Ltd at the end of first year is Rs.1000 lakh in absence of merger, which in case of merger the cash flow at end of first year is projected at Rs.1785 lakh. The required rate of returns for the firms that have risk-return characteristics similar to Emphasis Ltd is 14.5%. The number of equity shares outstanding in Emphasis Ltd is 450,000 while those in Metamorphosis Ltd are 200,000. If the acquisition takes place, the exchange ratio is likely to be 0.5 in the combined firm for the shareholders of Metamorphosis Ltd.
Case Questions:
a) Find out the Present Value (PV) of cash flows of Emphasis Ltd without the merger /acquisition.
[20]
b) Find out the Present value of cash flows of the combined firm (after merger). [15]
c) Do you approve of the merger? Your advice should be based on the Net Present value (NPV) of the acquiring firm (Emphasis Ltd.) [15]
BUSINESS ANALYSIS AND VALUATION
Assignment-I
Assignment Code: 2017DFM15B1 Last Date of Submission: 15th November 2017
Maximum Marks: 100
Attempt all the questions.
SECTION – A (25 marks for each question)
1. A customer pays $1,000 in advance for a service agreement. What are the financial statement effects of this transaction if (a) revenue is recognized at receipt of cash, and (b) revenue is recognized at delivery of the product? What forecasts, if any, do you have to make to complete the recording of this transaction? What factors would determine which of these two approaches is appropriate? As a financial analyst, what questions would you raise with the firm’s CFO?
2. True Value Ltd is planning to raise funds through issue of common stock for the first time. However, the management of the company is not sure about the value of the company and therefore it attempts to study similar companies in the same line which are comparable to True Value in most of the aspects. True Value feels that 50% weightage should be given to earnings in the valuation process; sales and book value may be given equal weightage. From the following information, compute the value of True Value Ltd. using the comparable firms approach:
Company True Value Ltd. Jewel Value Ltd. Real Value Ltd. Unique Value Ltd.
Rs (crore) Rs (crore) Rs (crore) Rs (crore)
Sales 250 190 210 270
Profit After Tax 40 30 44 50
Book Value 100 96 110 128
Market Value 230 290 440
.
Section-B (50 Marks)
Case Study
The following information is provided relating to the acquiring company (Efficient Ltd.) and the target company (Healthy Ltd.):
Particulars Efficient Ltd. Healthy Ltd.
Number of shares ( Face value Rs.10 each) Rs. 10 lakhs Rs. 7.5 lakhs
Market capitalization Rs. 500 lakhs Rs. 750 lakhs
P/E ratio (times) 10 5
Reserves and surplus Rs. 300 lakhs Rs. 165 lakhs
Promoter’s holding (number of shares) 4.75 lakhs 5 lakhs
Board of Directors of both the companies have decided to give a fair deal to the shareholders and accordingly for swap ratio the weights are decided as 40%, 25 % and 35% respectively for earnings, book value and market price of share of each company.
Case Questions:
a) Calculate the swap ratio and also calculate the promoter’s holding % after acquisition. [15]
b) What is EPS (earning per share) of Efficient Ltd. after acquisition of Healthy Ltd.? [12]
c) What is the expected market price per share and market capitalization of Efficient Ltd. after acquisition, assuming P/E ratio of firm Efficient Ltd. remains unchanged? [13]
d) Calculate the free float market capitalization of the merger firm. [10]
DFM 15
BUSINESS ANALYSIS AND VALUATION
Assignment-II
Assignment Code: 2017DFM15B2 Last Date of Submission: 15th November 2017
Maximum Marks: 100
Attempt all the questions.
SECTION – A (25 marks for each question)
1. a) What is a financial bond? List and explain the methods of bond valuation and
importance of YTM (yield to maturity). [3+10]
b) Briefly explain the various methods/ approaches undertaken to assess the value of the
target firm, as part of financial evaluation of a merger & acquisition proposal. [12]
2. a) One of the fastest growing industries in the last twenty years is the memory chip
industry, which supplies memory chips for personal computers and other electronic devices. Yet the average profitability for this industry has been very low. Using the industry analysis framework, list all the potential factors that might explain this apparent contradiction. [10]
b) ABC Ltd. Requires an initial investment of Rs 12 lakh for its new store for which Rs 4 lakh
would come from borrowing at an interest rate of 8%. The interest is paid for 5 years and the entire principal with interest is repaid at the end of the sixth year. The interest expenses are tax deductible at a rate of 36%, but the principal payments are not. The cash flows to the firm are expected to be Rs 80000 initially. These cash flows are expected to grow at a rate of 30% for the first four years and at 75% for the fifth year. Estimate the free cash flow to equity. [15]
Section-B (50 Marks)
Case Study
Emphasis Ltd has prepared a strategic roadmap for the next 10 years to boost its growth. The strategic plan has proposed inorganic growth and thus the firm has identified Metamorphosis Ltd as a target firm for horizontal merger. Such a merger would increase the market share of Emphasis Ltd from 32% at present to 54%.
The cash flows of Emphasis Ltd are expected to grow at 27.5% for the next 10 years on account of merger that is significantly above the current growth of 9.5%. The growth rate after 10 years is likely to normalize and come down to 12% level. In case Emphasis Ltd does not merge with Metamorphosis Ltd, its growth rate beyond year 10 is expected to come down to 6.5%. The projected cash flow for Emphasis Ltd at the end of first year is Rs.1000 lakh in absence of merger, which in case of merger the cash flow at end of first year is projected at Rs.1785 lakh. The required rate of returns for the firms that have risk-return characteristics similar to Emphasis Ltd is 14.5%. The number of equity shares outstanding in Emphasis Ltd is 450,000 while those in Metamorphosis Ltd are 200,000. If the acquisition takes place, the exchange ratio is likely to be 0.5 in the combined firm for the shareholders of Metamorphosis Ltd.
Case Questions:
a) Find out the Present Value (PV) of cash flows of Emphasis Ltd without the merger /acquisition.
[20]
b) Find out the Present value of cash flows of the combined firm (after merger). [15]
c) Do you approve of the merger? Your advice should be based on the Net Present value (NPV) of the acquiring firm (Emphasis Ltd.) [15]
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