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CH 32

XL is an Indian company that manufactures goods. It had net sales of Rs. 3,247 lakh in 2004 which is projected to grow at decreasing rates until 2012. The company's weighted average cost of capital is 14.45-15.02% based on its capital structure. A discounted cash flow valuation is performed to estimate the equity value of Rs. 5,037 lakh and per share value of Rs. 100.7 for XL.

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Mukul Kadyan
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57 views2 pages

CH 32

XL is an Indian company that manufactures goods. It had net sales of Rs. 3,247 lakh in 2004 which is projected to grow at decreasing rates until 2012. The company's weighted average cost of capital is 14.45-15.02% based on its capital structure. A discounted cash flow valuation is performed to estimate the equity value of Rs. 5,037 lakh and per share value of Rs. 100.7 for XL.

Uploaded by

Mukul Kadyan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CASE

Case 32.1:

Assumptions:
Years 1-7 8 - 12 XL's data: (Rs lakh) XL Cost of Capital
Growth rate 12% 6% Net block - 2004 729.12 Equity beta 1.2
CGS/Sales 65% Net sales - 2004 3247.31 Cost of debt 9.38%
S&Adm. 10% Working capital ratio 35.01% Risk free rate 6.38%
Capex = dep. Debt 470.4 Risk premium 9.00%
Dep -WDV 20% Book value equity 1,440.80 Cost of equity 17.18%
Tax 35% Number of share (lakh) 50 Post-tax cost of debt 6.10%
Share price 38.94 WACC (book value) 14.45%
Market value equity 1,947.00 WACC (market value) 15.02% 15%
Book value debt ratio 24.60%
Market valuedebt ratio 19.50%

Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Net sales 3,247.3 3,637.0 4,073.4 4,562.2 5,109.7 5,722.9 6,409.6 7,178.7 7,609.5 8,066.0
Cost of goods sold 2,364.0 2,647.7 2,965.4 3,321.3 3,719.9 4,166.2 4,666.2 4,946.2 5,242.9
Selling & admn. exp. 363.7 407.3 456.2 511.0 572.3 641.0 717.9 760.9 806.6
Depreciation 145.8 116.7 93.3 74.7 59.7 47.8 38.2 30.6 24.5
Total expenses 2,873.6 3,171.7 3,515.0 3,906.9 4,351.9 4,855.0 5,422.3 5,737.7 6,074.0
PBT 763.4 901.7 1,047.2 1,202.8 1,371.0 1,554.6 1,756.5 1,871.8 1,992.0
Tax @ 35% 267.2 315.6 366.5 421.0 479.8 544.1 614.8 655.1 697.2
PAT 496.2 586.1 680.7 781.8 891.1 1,010.5 1,141.7 1,216.7 1,294.8
Plus : Depreciation 145.8 116.7 93.3 74.7 59.7 47.8 38.2 30.6 24.5
Funds from operation 642.0 702.8 774.0 856.5 950.9 1,058.3 1,179.9 1,247.2 1,319.3
Less : Increase in NWC* 136.4 152.8 171.2 191.7 214.7 240.5 269.3 150.8 159.9
Cash from operations 505.6 549.9 602.9 664.8 736.2 817.8 910.6 1,096.4 1,159.4
Less : Capex 145.8 116.7 93.3 74.7 59.7 47.8 38.2 30.6 24.5
Free cash flows 359.8 433.3 509.5 590.1 676.4 770.0 872.4 1,065.8 1,135.0
Add : Salvage value
NCF 359.8 433.3 509.5 590.1 676.4 770.0 872.4 1,065.8 1,135.0
PVF at 15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284
Present value 5,507.8 312.9 327.6 335.0 337.4 336.3 332.9 328.0 348.4 322.6
Less: debt 470.4
Equity value 5,037.4
Per share value 100.7
* NWC (35% of net sales ) 1,137.0 1,273.4 1,426.3 1,597.4 1,789.1 2,003.8 2,244.2 2,513.5 2,664.4 2,824.2

Note: (1) Market value weighted cost of capital has been used as discount rate. (2) Zero growth is assumed after 12 years. Hence salvage value is calculated as
perpetual free cash flow (at the end of 12 year) discounted by WACC.
2014 2015 2016
8,550.0 9,063.09,606.8
5,557.5 5,891.06,244.4
855.0 906.3 960.7
19.6 15.7 12.5
6,432.1 6,812.97,217.6
2,117.9 2,250.12,389.2
741.3 787.5 836.2
1,376.7 1,462.61,553.0
19.6 15.7 12.5
1,396.2 1,478.21,565.5
169.5 179.6 190.4
1,226.8 1,298.61,375.1
19.6 15.7 12.5
1,207.2 1,282.91,362.6
9,083.7
1,207.2 1,282.9 10,446.3
0.247 0.215 0.187
298.4 275.8 1,952.5

2,993.7 3,173.3 3,363.7

after 12 years. Hence salvage value is calculated as

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