UNIT 2

Corporate Valuation
1. The following financial information is available for company D, an unlisted
pharmaceutical company, which is being valued
EBITDA: 400 million
Book value of assets: 1,000 million
Sales: 2,500 million
Based on the evaluation of number of listed pharmaceutical companies A, B and C have been
found to be comparable to company D. The financial information for these companies is
given below:
A B C
Sales 1600 2000 3200
EBITDA 280 360 480
Book Value of assets 800 1000 1400
Enterprise value (EV) 2000 3500 4200
Calculate the enterprise value of D using average value estimates.

2. Following is the balance sheet of hypothetical company limited as on March 31, current
year:
(Rs in lakhs)
Liabilities Amount Assets Amount
Share Capital 40 Fixed Assets 150 120
40,000 11% preference shares Less: Depreciation 30
of Rs.100 each, fully paid up.
Current Assets
1,20,000 equity shares of 120 Stocks 100
Rs.100 each, fully paid up. Debtors 50
Cash & Bank 10
Profit & Loss Account 23
Preliminary Expenses 02
10% debentures 20

Trade Creditors 71

Provision for Income Tax 08

282 282
Additional Information:
i) A firm of professional valuers has provided the following market estimates of its various
assets: Fixed assets Rs.130 lakhs, stocks Rs102 lakhs, debtors Rs.45 lakhs. All other assets
are to be taken at their balance sheet values.
ii) The company is yet to declare and pay dividend on preference shares
iii) The valuers also estimate the current sale proceeds of the firm’s assets, in the event of its
liquidation: fixed assets Rs.105 lakhs, stock 90 lakhs, debtors Rs.40 lakhs. Besides, the firm
is to incur Rs.15 lakhs as liquidation costs.
You are required to compute the net asset value per share as per book value, market value and
liquidation value.

3. In the current year, a firm has reported a profit of Rs.65 lakhs, after paying taxes @ 35%.
On close examination, the analyst ascertains that the current year’s income includes: i)
extraordinary income of Rs.10 lakhs and ii) extraordinary losses of Rs.3 lakhs. Apart from
existing operations, which are normal in nature and are likely to continue in the future, the
company expects to launch a new product in the coming year.
Revenue and cost estimates in respect of the new product are as follows:
(Rs in lakhs)
Sales 60
Material Cost 15
Labour Cost (additional) 10
Allocated fixed cost. 5
Additional fixed cost 8

a) From the given information, compute the value of the business, given that capitalisation
rate applicable to such business in the market is 15 percent.
b) Determine the market price per share assuming
i. The company has 1,00,000 11% preference shares of Rs.100 each fully paid-up
ii. The company has 4,00,000 equity shares of Rs.100 each, fully paid-up
iii. P/E ratio 8 times

4. Suppose the firm has employed a total capital of Rs.1,000 lakhs (provided equally by 10
percent debt and 5 lakh equity shares of Rs.100 each), its cost of equity is 14% and it is
subject to corporate tax rate of 40 percent. The projected free cashflows to all investors of the
firm for 5 years are given below:
Year end Rs (in lakhs)
1 300
2 200
3 500
4 150
5 600

Compute a) valuation of firm b) valuation of equity shares. Assume 10 percent debt is

repayable at year 5 and interest is paid at each year end.
5. The following particulars are available in respect of a corporate:
1. Capital employed is Rs.500 million.
2. Operating profits after taxes for last three years are Rs.80 million, Rs.100 million,
Rs.90 million; current year operating profit after taxes is Rs.105 million.
3. Riskless rate of return is 10 percent.
4. Risk premium relevant to the business of corporate firm is 5 percent.
You are required to compute the value of goodwill, based on the present value of
super profits method. Super profits are to be computed on the basis of the average
profits of 4 years. It is expected that the firm is likely to earn super profits for the next
five years only.

6. The following particulars are available in respect of a corporate:

Future Maintainable Profit: Rs. 33.5 crores
Normal rate of return: 12% pa
Capital employed as on 31 March 20XX: Rs. 250 crores
Determine the value of goodwill assuming the firm will earn super profit for the next 5 years.
Also calculate the value of goodwill using capitalisation method.