PRACTICE QUESTIONS FOR SESSION-II & SESSION-III CLASS ON VALUATION OF M&A

Note: Please bring calculators in the class of valuation

I.

Learning how to calculate reinvestment rate and growth rate for valuation

Q1. Estimate the Equity reinvestment rate and growth rate for Exxon Mobil & Toyota with the given information: Company Net Income Capital Change Net Expenditure in Debt (net) Working Capital 4243 336 333 925 -50 140 ROE

Exxon Mobil Toyota

25011 1141

21.88% 16.55%

Q2. Estimate the Firm reinvestment rate and growth rate for Birla

Cement & Siemens with the given information: Company EBIT(1T) Capital Depreciation Change ROC Expenditure in (net) working capital 110 60 52 20.49%

Birla Cement

173

Siemens 1414 2027 1196 II. Learning valuation by FCFE Models

-19

19.93%

Stable model: An oil company has a net income of Rs25.3bn in 2012 and average net income over the past has been Rs.18405bn. interest income from cash has been Rs321 mn. Book value of equity in 2011 was 93297 bn and cash was Rs. 10626 bn. If average reinvestment rate over the past five years has been 16.98% and cash and marketable securities in 2012 are Rs 18.5bn while it had 622.4 bn shares (nos.) outstanding. Find the value of equity shares of the company.(Take Rf = 5.5%, Beta=0.8, risk premium = 8.5%) Two Stage model: A company reported net income of Rs.3171 billion in 2012 year out of which 29.68 billion reflected after tax income from cash holdings. Book value of firm is Rs.8625bn and cash holdings are Rs. 1730 billion in previous year. Capital expenditure and depreciation in last year were 2923 & 998 bn respectively. Working capital decreased by Rs. 50 bn. And the firm increased its debt by Rs. 140 bn. During the year Beta of the firm is 1.1 and Rf=5%. The company has a potential for high growth due to a patent for five years after which it will resume stability. Determine the value of comapnys stock given it has 12 bn shares outstanding and current cash balance is 1200 bn.

Three stage FCFE A company has Net Income of Rs.915.2 out of which 25.5 mn is from cash. Net capex is 880.3 mn and non cash working capital change was Rs.59.93 mn. Net debt cash flows were 92.17mn. book value of equity and cash holdings in the previous year were 4071mn & 850mn respectively. Beta of the company is 1.2 and Rf is 5.5%. current year cash balance is 18.17mn and it has 1346mn shares outstanding. The firms investments are expected to generate a supernormal growth over the next five years after which it will experience a tranition to stability over a five yr time span. Find the price of its shares. III. Learning valuation by DDM model:

Stable Model A company has EPS of Rs.2.08 and paid a dividend of Rs.1.36 per share. If its ROE is expected to be 11.16% find its share price given a risk free rate of 5.5% and beta of firm to be 0.8. Two stage Model: A company has expected payout of 9.075% and due to a new patent its current ROE is 22.49%. Beta of stock is 1.2 and risk free rate is 5.5%. current EPS is 11.03 Rs. The company will grow supernormally for 5 yrs after which its growth will slow down and become stable. What is its expected price? Three Stage model: Canara bank is registering a rapid growth and its current ROE is 23.22% and it paid a dividend of Rs.5.50 per share on an earnings of 33.27 per share. Beta of the stock is 1.1 and it is

expected to grow at the current rate for 5 yrs after which it will decline towards stable growth in next five years. Find its share price.

IV. Learning valuation by FCFF model: Birla cement has reported operating income of Rs.231.8mn and its ROC is 19.25%. Tax rate is 30%. Net Capex is 49 mn and increase in non-cash working capital is 52 mn in current year. Beta of the firm is 0.83 and risk free rate in India is 5% while country risk premium is 3.6%. Long term bonds have been issued by the company at an interest rate of 4.17% and default spread is 0.24%. Equity weight is 82.4% while debt is 17.6%. The company will experience high growth for 5 years after which it will turn stable with beta of 1. V. Learning Other Approaches to valuation

P/E Multiple: Q1. Yr EPS 1 67.93 2 78.24 3 101.65 If forecasted EPS is @30% forecasted price? Price 1324.1 1430.15 2012.6 growth is 132 P/E 13.02 18.27 29.62 what will be

Q2. Current Price is Rs.672 and EPS is 25.46. Two forecasts of EPS are available; Rs. 35 & Rs.38. what will be forecasted price? Q3. Market price of NTPC is rs.190, EPS is 9.26. Index weighted PE is 21.34, Expected index PE multiplier is 25.62. what will be companys expected price per share if growth rate is 8%?