Corporate Valuation Mid-Term Practice Questions PDF

*(You are expected to solve the questions in the notes/chapters yourself)* **Question 1** From the information provided in the financial statement below, calculate NOPAT, Invested Capital, ROIC and Free Cash for the years 2 and 3: **Table 1: Balance sheet as at the end of years 1,2 and 3(Amount R...

*(You are expected to solve the questions in the notes/chapters yourself)* **Question 1** From the information provided in the financial statement below, calculate NOPAT, Invested Capital, ROIC and Free Cash for the years 2 and 3: **Table 1: Balance sheet as at the end of years 1,2 and 3(Amount Rs Crores)** Year 1 Year 2 Year 3 ------------------------------------------ ---------------------------- ---------------------------- ---------------------------- **ASSETS** Cash 37.30 41.40 45.12 Inventory 522.14 579.58 631.74 Accounts receivable [932.40] [1,034.96] [1,128.11] **Total current assets** **[1,491.84]** **[1,655.94]** **[1,804.97]** Gross PPE 2619.28 3,031.40 3,443.32 Accumulated Depreciation [(754.48)] [(961.47)] [(1,187.09)] **Net PPE** **[1,864.80]** **[2,069.93]** **[2,256.23]** **Total assets** **[3,356.64]** **[3,725.87]** **[4,061.20]** **LIABILITIES AND SHAREHOLDERS' EQUITY** Accounts payable 372.96 413.99 451.24 Accrued expenses 186.48 206.99 225.62 Short-term debt [183.19] [285.90] [381.71] **Total current liabilities** **[742.63]** **[906.88]** **[1,058.57]** Long-term debt [1,000.00] [1,000.00] [1,000.00] **Total liabilities** **[1,742,63]** **[1,906.88]** **[2,058.57]** Common stock (share capital) 500 600 600 Retained earnings (Reserves and Surplus) [1,114.01] [1,218.99] [1,402.63] **Total Common Equity** **[1,614.01]** **[1,818.99]** **[2,002.63]** **Total liabilities and equity** **[3,356.64]** **[3,725.87]** **[4,061.20]** **Table 2: Income Statement for years 1,2 and 3 (Rs in Crores)** Year 1 Year 2 Year 3 ------------------------------------------- -------------------------- -------------------------- -------------------------- Sales 3,729.60 4,139.86 4512.44 Costs of goods sold (2,312.35) (2,566.71) (2797.71) Sales and general administrative expenses (745.92) (827.97) (902.49) Depreciation [(186.48)] (206.99) (225.62) **Operating profit** **[484.85]** **[538.19]** **[586.62]** Interest expense (88.05) (96.49) (105.73) **Earnings before taxes** **396.80** **441.70** **480.89** Taxes [(158.72)] [(176.68)] [(192.36)] **Net income (net profit)** **[238.08]** **[265.02]** **[288.53]** **Table 2: Statement of cash flows for years 2 and 3 (Rs in Crores)** Year 2 Year 3 -------------------------------------------------- ---------------------------- ---------------------------- **Operating Activities** Net income 265.02 288.53 Depreciation 206.99 225.62 Change in inventory (57.44) (52.16) Change in accounts receivables (102.56) (93.15) Change in accounts payable 41.03 37.25 Change in accruals [20.51] [18.63] Net cash from operating activities **[373.55]** **[424.72]** **Investing Activities** Investment in PP&E [(412.12)] [(411.92)] **Net cash from investing activities** **[(412.12)]** **[(411.92)]** **Financing Activities** Change in short-term debt 102.71 95.81 Change in long-term debt 0.00 0.00 Change in common stock (Equity) 100.00 0.00 Common dividends (Cash dividend to shareholders) [(160.04)] [(104.89)] **Net cash from financing activities** **[42.67]** **[(9.08)]** **Net change in cash** **4.10** **3.72** Starting cash [37.30] [41.40] **Ending cash** **[41.40]** **[45.12]** **Question 2** An Indian company manufactures bread. Over the last year, profitability has been strong. The share price has risen from Rs 15 to Rs 25 per share. Financial analysts estimate that the growth will continue. The company has 20 million shares outstanding. The company's borrowing is conservative. Its debt stands at Rs 100 million. The bond trades at a yield-to-maturity of 100 basis points (1 per cent) above the Indian risk-free bonds. The company's market beta (levered beta) is 0.7. Indian risk-free rate is 7 per cent, and market risk premium is 8 per cent. The corporate tax rate is 30 per cent. What is the company's WACC? Assume that the current capital structure is the target capital structure. **Question 3** Exhibit 1: Income Statement (Rs million) Current year Nest year ---------------------------------------------- ---------------------- ---------------------- Revenue 1,210 1,307 Operating expenses (other than depreciation) (1,053) (1,111) Depreciation [(36)] [(39)] **EBIT** **121** **157** Interest expense (15) (15) Gain/(loss) on sale of assets [(10)] [-] **EBT** **96** **142** Taxes [(29)] [(43)] **Net profit** **** **** Dividends 27 40 Exhibit 2: Balance sheet (Rs million) Current year Nest year --------------------------------------- ------------------------- ------------------------- Operating cash 24 26 Excess cash and marketable securities 74 83 Accounts receivables 242 262 Inventory **Current assets** **703** **763** Property, plant, and equipment 484 523 Investments in financial assets 50 50 **Total assets** **[1,237]** **[1,336]** Accounts payable 303 327 Short-term debt 90 90 Accrued expenses **Current liabilities** **574** **613** Long-term debt 210 210 Share capital 100 100 Retained earnings **Total liabilities and equity** **1,237** **1,336** Required: \(a) Reorganise the financial statements. \(b) Compute NOPAT, Invested Capital, and ROIC for the current and next years. Assume an operating tax rate of 30 per cent. \(c) Calculate the company\'s Free Cash Flow (FCF) for the next year. \(d) If the weighted average cost of capital is 10 per cent, is the firm creating value? \(e) In which year is the company performing better? Why? **Question 4** The following forecast is available for a company: 1\. Earnings (NOPAT) in the 1^st^ year: Rs 100 2\. The explicit forecast period is five years. 3\. Growth rate during the explicit period: 2^nd^ year: 6%, 3^rd^ year -- 5^th^ year: 4% 4\. The growth in the sixth year is expected to be 4% 5\. For calculating continuing value, consider a growth rate of 3% 6\. Consider ROIC 7% and WACC 9% *Required:* Calculate the enterprise value using the DCF valuation method. **Question 5** A company provides the following data and information: Table 1: Inputs for the explicit forecast period and perpetuity 1. EBIT\* for the current year Rs 1,250.00 ---- --------------------------------- ------------------------ 2. Tax expense \@35% [(437.50)] 3. EBIT 812.50 4. Reinvestment 285 5. Growth rate (forecasted period) 10% 6. Growth rate (steady state) 4% 7. Explicit forecast period 3 years \* The company has no income other than operating income. Table 2: Discount rate input data Forecast period Steady state ---- ---------------- ----------------- -------------- 1. Beta 1.07 1 2. Risk-free rate 5.50% 5.50% 3. Risk premium 6% 6% 4. Weight Debt 10% 10% 5. Weight Equity 90% 90% 6. Cost of debt 5% 4% **Required** Calculate the enterprise value using the DCF method.