Module 2 – Asset Based Valuation for Going

Concern Opportunities Part 1

Activities/Assessments:
1. XYZ Company is exploring two mutually exclusive opportunities. There are two
available opportunities for XYZ with the following information:
a. ABC Company has projected annual returns of Php7 Billion and
outstanding liabilities of Php5Billion.
b. DEF Company has projected annual returns of Php12 Billion and
outstanding liabilities of Php20 Billion.
c. Both companies have terminal value of Php100 Billion.
If you will assess the company for five years with the required rate of return of 10%, which
company will you recommend purchasing and how much? Why?

ABC COMPANY
In billion pesos YEAR
1 2 3 4 5 TOTAL
Net Cash Flows 7.0 7.0 7.0 7.0 7.0
Add: Terminal Value 100.0
Free Cash Flows 7.0 7.0 7.0 7.0 107.0
Multiply: Discount Factor @ 7% .9091 .8264 .7513 .6830 .6209
Discounted Cash Flows 6.36 5.78 5.25 4.78 66.44
Free Cash Flows - Firm 88.62
Less: Outstanding Liabilities 5.0
Free Cash Flows - Equity 83.62

DEF COMPANY
In billion pesos YEAR
1 2 3 4 5 TOTAL
Net Cash Flows 12.0 12.0 12.0 12.0 12.0
Add: Terminal Value 100.0
Free Cash Flows 12.0 12.0 12.0 12.0 112.0
Multiply: Discount Factor @ 7% .9091 .8264 .7513 .6830 .6209
Discounted Cash Flows 10.91 9.92 9.06 8.20 69.54
Free Cash Flows - Firm 107.63
Less: Outstanding Liabilities 12.0
Free Cash Flows - Equity 87.63

ABC Company will be recommendable for XYZ Company to purchase than DEF
Company. Although, DEF Company has higher Free Cash Flow – Equity, most of their Free
Cash Flows – Firm was consumed in paying their liabilities, as compared to ABC Company that
has lower liabilities, their Free Cash Flows – Equity generated is higher. This only means that
ABC Company is more stable company because they only accumulated lower liabilities but still
manage to generate higher Free Cash Flows – Equity.

2. Using the information in No. 1, which is a better choice if the initial investment for ABC
Company and DEF Company is Php50 Billion and Php110 Billion, respectively. The cost
of capital for the two companies are 10%.

ABC COMPANY DEF COMPANY

Annual Return Php 7,000,000,000.00 Php 12,000,000,000.00
Less: Cost of Capital * Php 5,000,000,000.00 Php 11,000,000,000.00

Economic Value Added Php 2,000,000,000.00 Php 1,000,000,000.00

ABC Company is resulted to Php 2 Billion economic value added, which is higher
compared to the Php 1 Billion EVA of DEF Company. This means that ABC Company is a better
choice between the two.

*Cost of Capital = Investment Value x Rate of Cost Capital

ABC Company DEF Company

Php 50 Billion Php 110 Billion
x 10% x 10%
Php 5 Billion Php 11 Billion

3. XYZ Company is offered to purchase ABC Company with EPS of Php12 and P/E ratio
of 5; while DEF Company has EPS of Php15 and P/E ratio of 4. What is the value of
the two companies? Which one is a better? Why?

Market Value per Share = P/E Ratio x Earnings per Share

ABC COMPANY DEF COMPANY

Earnings per Share Php 12.00 Php 15.00
Multiply: Price – Earnings Ratio 5 4

Market Value per Share Php 60.00 Php 60.00

ABC Company and DEF Company both valued at Php 60.00 per share. However, if
to be observed, ABC’s P/E Ratio is 5x while DEF could only give 4x of the value. That is why,
ABC Company is the better company to be chosen by XYZ to be purchased.