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    CA FINAL SFM EQUITY TEST PAPER SOLUTION

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    apoorvbansalmzn

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    CA FINAL SFM EQUITY TEST PAPER SOLUTION

    Uploaded by

    apoorvbansalmzn
    2 views5 pages

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    © © All Rights Reserved

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    © All Rights Reserved
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    Download as pdf or txt
    2 views5 pages

    CA FINAL SFM EQUITY TEST PAPER SOLUTION

    Uploaded by

    apoorvbansalmzn

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    CA FINAL

    STRATEGIC FINANCIAL MANAGEMENT


    EQUITY VALUATION
    TEST PAPER (SOLUTIONS)
    1.

    a. Existing Earnings = 5000 × 50 = 2,50,000


    New Earnings = 65,000
    = 3,15,000
    2
    Fight shares to be issued  5000   2000
    5
    So, no. of shares outstanding right issue = 5000 + 2000 = 7000
    3,15, 000
    So, new EPS = DPS   45
    7000

    b. Since the firm is no growth firm –


    EPS a
    P0  or  ?
    Re i
    Before the acceptance of project
    50
    400   Re  12.5%
    Re
    EPS 45
    After the project, new price    360
    Re 0.125

    c. Wealth of share holders price to acceptance of project = 5000 × 400 = 20,00,000


    Wealth of share holders after acceptance of project =
    New market cup – amount paid for right shares = 7000 × 360 – 2,00,000 = 23,20,000
    So overall gain to share holders = 23,20,000
    65, 000
    Conceptually this much be equal to NPV of the project   5, 20, 000
    0.125

    2.

    a. Rf + (Rm - Rf)
    = 6.25 + 5.5 × 1.05
    = 12.025%
    D0 = 1.7; g = 7% D1 = 1.7 × 107% = 1.819
    D1 1.819
    PV0    36.20
    Re  g 012025
    .  0.07

    b. Market Value of Equity = 160 × 51 = 8160 lacs


    Debt = 160 × 100 = 1600 lacs
    = 9760 lacs.
    Equity Financing Ratio = We  83.61%
    = Wd = 16.39%

    SANJAY SARAF SIR 1


    Capital Spending  Dep WC
    Net investment 1 share 
    no of shares
    475  315  0
     ` 1 / share
    160
    Equity Investment / share = 83.61% × 1
    = 0.8361
     FCFE0  EPS - Equity Investment/share
    = 3.2 - 0.836
    = 2.3639
    g = 7%

     FCFE1 = 2.3639 × 107%


    = 2.5294
    FCFE1 2.5294
     PV0    50.34
    Re  g 012025
    .  0.07

    c. The value estimates as per DDM & FCFE are different because of difference in the estimate of D &
    FCFE - D is 1.819 & where as FCFE, is 2.5294
    d. If we are a minority share holder we should use DDM. If we are a potential acquirer we should use
    FCFE approach.
    3. For year ended
    EBIT = 40% of 70,000 = 28,000
    NOPAT = EBIT (1 – t) = 28,000 (1 – 0.35) = ` 18,200.
    Net Investment = [(C.S – Dep) + WC]
    = [10,000 + 2,000]
    = 12,000
    So, FCFF for year ended = NOPAT – Net Investment
    = 18,200 – 12,000 = ` 6,200
    So, FCFF for next year = 6,200 × 1.06 = ` 6572
    Target debt ratio = 0.4 i.e. Wd = 0.4. So, We = 1 – 0.4 = 0.6
    Post Tax Kd = I (1 - t) = 12 (1 - 0.35) = 7.8% and Ke = 15%

    So, Kc = W d × K d + W e × Ke
    = 0.4 × 7.8 + 0.6 × 15
    = 3.12 + 9 = 12.12%
    FCFF1 6572
    Value of firm    `1, 07 , 385.62
    Kc  g 0.1212  0.06
    Value of equity = 1,07,385.62 – 60,000 = 47,385.62
    47 , 385.62
    Value/share  ` 236.93
    200
    The shares are underpriced. It is a good acquisition target.

    SANJAY SARAF SIR 2


    4. Step - 1 :
    Computation of NOPAT
    Interest Expense = 8% of 350 lakh = ` 28 lakhs.
    EBIT
    So, FL 
    PBT
    EBIT
    1 .8 
    EBIT  28
    1.8 EBIT – 50.4 = EBIT
    EBIT = ` 63 lakhs
     NOPAT = EBIT (1 – t)
    = 63 × 0.7 = ` 44.1 Lakhs

    Step - 2 :

    Computation of Capital Charge

    Source of finance BV W K W×K


    Equity 350 0.5 16 8
    Debt 350 0.5 8 × 0.7 = 5.6 2.8
    CE 700 1 Kc  10.8

    Cap charge = 10.8% of 700 = 75.6 lakhs

    Step - 3 :

    EVA = NOPAT – Cap. Charge


    = ` (44.1 – 75.6) lakhs
    = (` 31.5) lakhs – Value Destruction

    5.

    a. IV0 = PV of all future dividend discounted at Re


    10 20 25 212.50
       
    1.1 1.1 2
    1.1 1.1 4
    3

    = 9.09 + 16.53 + 18.78 + 145.14


    = ` 189.54
    b.

    Particulars 1 2 3 4
    i. BVPS at beginning of year 100 110 125 150
    ii. EPS for the year 20 35 50 62.5
    iii. DPS for the year 10 20 25 212.5
    iv. BVPS at end of year (i + ii – iii) 110 125 150 0
    v. Equity Charge (Re × i) 10 11 12.5 15
    vi. Residual income (ii – v) 10 24 37.5 47.5
    vii. PV @ 10% 9.09 19.83 28.17 32.44

    SANJAY SARAF SIR 3


     Extra Value/share (MVA type) = 9.09 + 19.83 + 28.17 + 32.44
    = 89.54
    (+) BVPS 100.00
    IV0 = 189.54

    c.
    Particulars 1 2 3 4
    i. BVPS at beginning of year (1 – t) 100 110 125 150
    ii. EPS for the year 20 35 50 62.5
    iii. DPS for the year 10 20 25 212.5
    iv. BVPS at end of year 110 125 150 0
     ii  20% 31.82% 40% 41.67%
    v. ROE   100
    i 
    vi. [(v) – 10]% of i {Residual income} 10 24 37.5 47.5
    vii. PV @ 10% 9.09 19.83 28.17 32.44

     Extra Value/share = 89.54


    = 89.54
    (+) BVPS 100
    IV0 = 189.54

    6. Projected Balance Sheet

    Year 1 Year 2 Year 3 Year 4 Year 5


    Fixed Assets (25% of Sales 13,000 16,900 21,970 28,561.00 28,561.00
    Current Assets (15% of Sales) 7,800 10,140 13,182 17,136.60 17,136.60
    Total Assets 20,800 27,040 35,152 45,697.60 45,697.60
    Equity (37.5% of sales) 19,500 25,350 32,955 42,841.50 42,841.50
    Sundry Creditors (2.5% of Sales) 1,300 1,690 2,197 2,856.10 2,856.10
    Total Liabilities 20,800 27,040 35,152 45,697.60 45,697.60

    Projected Cash Flows

    Year 1 Year 2 Year 3 Year 4 Year 5


    Sales 52,000 67,600 87,880.00 1,14,244.00 1,14,244.00
    PBT (15% of sales) 7,800 10,140 13,182.00 17,136.60 17,136.60
    PAT (10.5% of sales) 5,460 7,098 9,227.40 11,995.62 11,995.62
    Depreciation 1,500 1,950 2,535.00 3,295.50 4,284.15
    Addition to Fixed Assets 4,500 5,850 7,605.00 9,886.50 4,284.15
    Increase in Net Current Assets 1,500 1,950 2,535.00 3,295.50 -
    Operating cash flow 960 1,248 1,622.40 2,109.12 11,995.62

    SANJAY SARAF SIR 4


    Projected Cash Flows

    Present value of Projected Cash Flows

    Cash Flows PVF at 15% PV


    960 0.870 835.20
    1248 0.756 943.49
    1622.40 0.658 1067.54
    2109.12 0.572 1206.42
    4,052.65

    Residual Value = 11,995.62/0.15 = 79,970.80


    Present value of Residual value = 79,970.80 x PVF (15%, 4)
    = 79,970.80 x 0.572 = 45,743.30
    Total shareholders’ value = 45743.30 + 4052.65 = 49795.95
    Pre-strategy value = 4200 / 0.15 = 28,000
     Value of strategy = 49795.95 – 28,000 = 21795.95

    Conclusion: The strategy is financially viable.

    SANJAY SARAF SIR 5

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