valuation of securities calculation through P/E and P/BV and DCF valuation

1. DCF Valuation_Q.1
Inputs
Book value of debt 3068
Market value of debt 3200
No of shares 62
price per share 64
market value of equity 3968
Tax rate 0.4
Beta 1.1
Risk Free rate 7.0%
Market risk premium 6.0%
Growth rate (1) 9.5%
Stable growth rate 4.0%
Calculation of WACC (growth )
Cost of debt 8.00%
Cost of equity 13.60%
proportion of debt 0.45
proportion of equity 0.55
WACC 9.67%
Calculation of WACC in stable period
Cost of debt 7.50%
cost of equity 13.60%
propotion of debt 0.33
proportion of equity 0.67
WACC 10.57%
1993 1994
Revenues 13500.00 14782.50
EBITDA 1290.00 1412.55
Depreciation 400.00 438.00
EBIT 890.00 974.55
EBIT(1-t) 534.00 584.73
Depreciation 400.00 438.00
Capex 450.00 492.75
WC 945.00 1034.78
Change in WC 89.78
FCFF 440.21
440.21
PV 401.39
Value of the firm 8317.97
Value of equity 5117.97
Value of equity per share 82.55

2. Here, given Market Price = Rs. 64 whereas the Intrinsic Value = Rs. 82.55. Therefore, the share price is undervalued and is r

3. 1995 1996 1997 1998
16186.84 17724.59 19408.42 21252.22
1546.74 1693.68 1854.58 2030.77
479.61 525.17 575.06 629.70
1067.13 1168.51 1279.52 1401.07
640.28 701.11 767.71 840.64
479.61 525.17 575.06 629.70
451.00 493.85 452.00 494.94
1133.08 1240.72 1358.59 1487.66
98.30 107.64 117.87 129.07
482.02 527.82 577.96 632.87
10023.05
482.02 527.82 577.96 10655.91
400.76 400.13 399.51 6716.19

4. rice is undervalued and is recommended to BUY.

5. DCF Valuation_Q.2
Inputs
Beta 1.15
Debt/(Debt+Equity) 20% Health Division
Cost of Debt 7.50%
Tax rate 40%
T-Bond Rate (Rf) 7%
Market Risk Premium 5.5% Assuming
A. Calculation for WACC (Health Division)
Cost of Equity 13.33%
Cost of Debt 4.50%
Proportion of Debt 0.2
Proportion of Equity 0.8
Tax Rate 40%
WACC 11.56%
B. Calculation Of Valuation of the Division
Growth Rate 6% Stable Growth Rate
1993 1994 1995 1996
Revenue 5285 5602.10 5938.23 6294.52
EBIT 560 593.60 629.22 666.97
EBIT(1-T) 336 356.16 377.53 400.18
Capex 420 436.80 454.27 472.44
Depriciation 350 364.00 378.56 393.70
FCFF 266 283 302 321
FCFF 283 302 321
PV 254.00 242.51 231.51
Value Of the Division 4062

6. 4%
1997 1998
6672.19 7072.52
706.99 749.41
424.19 449.64
491.34 510.99
409.45 425.83
342 364
5014
342 5378
220.99 3112.54

7. DCF Valuation_Q.3
Inputs
EPS 0.85
Revenue per share 12.5
Working Capital 40% of Revenue
WC 5
Growth Rate 20%
Declining Growth Rate 5%
Beta 1.1
Risk Free rate 7%
Market Risk Premium 6%
Debt Ratio 15%
Equity Ratio 85%
Cost of Debt 7.5% Assuming
WACC Calculation
Cost of Debt 7.5%
Proportion of Debt 0.15
Tax Rate 40%
Cost of Equity 13.05%
Proportion of Equity 0.85
WACC 11.77%
A. Calculation of FCFE
Growth Rate 20%
1993 1994
Revenue 12.50 15.00
Earning 0.85 1.02
Working Capital 5.00 6.00
Change in WC 1.00
Working capital*(1-Debt Ratio) 0.85
FCFE 0.17
PV 0.15
Value Per Share 13.14
B. There might be potential for synergy, with an acquirer with related businesses. The health
C. Sensitivity Analysis of valuation with Working Capital change

9. 40%
Debt Ratio 0.15
Decline Rate 5% 15% 10% 5%
1995 1996 1997 1998 1999 2000 2001
18.00 21.60 25.92 31.10 35.77 39.35 41.31
1.22 1.47 1.76 2.12 2.43 2.68 2.81
7.20 8.64 10.37 12.44 14.31 15.74 16.53
1.20 1.44 1.73 2.07 1.87 1.43 0.79
1.02 1.22 1.47 1.76 1.59 1.22 0.67
0.20 0.24 0.29 0.35 0.85 1.46 2.14
27.92
0.16 0.17 0.18 0.19 0.41 0.62 11.27
ith related businesses. The health division at Kodak might also be mismanaged, thereby creating the potential for additional
Using Data Table
WC as a % of
Revenue Valuation

10. 40% 13.141
10% 15.959
20% 13.672
30% 11.385
35% 10.241
40% 9.097
45% 7.954
50% 6.810
60% 4.523
70% 2.236
85% -1.195
90% -2.339

11. DCF Valuation_Q.4
Inputs
EPS 0.56
Revenue per share 2.91
Capex 13%
Depriciation 8%
Working Capital 60% of revenue 0.60
WC 1.746
Calculation of WACC at Growth stage
Debt 0.100
Equity 0.900
Beta 1.45
T-Bond rate 7.00%
Market Risk Premium 6.00% Assuming
Interest rate 7.50% Assuming
Tax Rate 40.00%
Cost of Equity 15.70%
Cost of Debt 7.50%
WACC 14.58%
Calculation of WACC at Stable stage
Beta 1.10
Equity 0.90
Debt 0.10
T-Bond Rate 7.00%
Market Risk Premium 6.00%
Interest rate 7.50%
Tax rate 40.00%
Cost Of Equity 13.60%
Cost of Debt 7.50%
WACC 12.69%
Growth Rate Estimation
Growth rate from 1994-1998 17.00%
Growth Rate From 1998 to 2003 2.40%
Growth Rates 1999 2000 2001
14.60% 12.20% 9.80%
WC Rate Calculation
WC 60% From 1994-1998
Rate from 1998-2003 6%
WC as a % of Revenue 1999 2000 2001
54% 48% 42%

12. A. Calculation of FCFE
1993 1994 1995
Revenue 2.91 3.40 3.98
EPS 0.56 0.66 0.77
Capex 0.13 0.15 0.18
Depriciation 0.08 0.09 0.11
Working Capital 1.75 2.04 2.39
Change in WC 0.30 0.35
FCFE 0.34 0.40
FCFE 0.34 0.40
PV 0.30 0.30
Value Per Share 3.66
Note Capital Expenditure and Depriciation offsets each other in tha stable stage.So they are n
B. Working Capital stays 60% of Revenue forever 0.6
Discount Rate 0.1458
Calculation for Working Capital
1993 1994 1995
Revenue 2.91 3.4047 3.983499
EPS 0.56 0.6552 0.766584
Capex 0.13 0.1521 0.177957
Depriciation 0.08 0.0936 0.109512
Working Capital 1.746 2.04282 2.390099
Change in working Capital 0.29682 0.347279
FCFE 0.344772 0.403383
FCFF 0.344772 0.403383
PV 0.297988 0.301336
Valuation Per Share 10.95546
C. Beta remains 1.45 forever
If the beta remains 1.45, then the discount rate would be the cost of equity at beta 1.45 i.e
Cost of Equity 0.157
1994 1995 1996
FCFE 0.344772 0.403383 0.471958

13. FCFE 0.344772 0.403383 0.471958
PV 0.297988 0.301336 0.304722
Valuation Per Share 3.493451

14. (Remains same from 1994 to 1998)
Growth rate after 2003 onwards 5%
2002 2003
7.40% 5.00%
30% from 2003 onwards
2002 2003
36% 30%

15. 1996 1997 1998 1999 2000 2001 2002 2003
4.66 5.45 6.38 7.31 8.20 9.01 9.67 10.16
0.90 1.05 1.23 1.05 0.92 0.83 0.77 0.73
0.21 0.24 0.29 0.24 0.21 0.19 0.18 0.17
0.13 0.15 0.18 0.15 0.13 0.12 0.11 0.10
2.80 3.27 3.83 3.95 3.94 3.78 3.48 3.05
0.41 0.48 0.56 0.12 -0.01 -0.15 -0.30 -0.44
0.47 0.55 0.65 0.87 0.87 0.91 0.99 0.30
3.60
0.47 0.55 0.65 0.87 0.87 0.91 0.99 3.90
0.30 0.31 0.31 0.36 0.31 0.28 0.27 0.91
stable stage.So they are not taken into account in FCFE for 2003.
1996 1997 1998 1999 2000 2001 2002 2003
4.660694 5.453012 6.380023784 7.311507 9.490247948 12.35 16.11332 21.07857
0.896903 1.049377 1.2277709 1.227771 0.861910028 0.602185 0.418686 0.28967
0.20821 0.243605 0.285018245 0.285018 0.200086257 0.139793 0.097195 0.067245
0.128129 0.149911 0.175395843 0.175396 0.123130004 0.086026 0.059812 0.041381
2.796416 3.271807 3.82801427 4.386904 5.694148769 7.410001 9.667991 12.64714
0.406317 0.475391 0.556207202 0.55889 1.307244415 1.715852 2.257989 2.97915
0.471958 0.552191 0.646063841 0.643649 -0.371557572 -0.98187 -1.64117 3.26882
39.91001
0.471958 0.552191 0.646063841 0.643649 -0.371557572 -0.98187 -1.64117 43.17883
0.304722 0.308146 0.31160803 0.268318 -0.133872879 -0.30576 -0.44173 10.04471
st of equity at beta 1.45 i.e,15.70%
1997 1998 1999 2000 2001 2002 2003
0.552191 0.646064 0.871059692 0.869248 0.914613234 0.988566 0.295154
2.89637

16. 0.552191 0.646064 0.871059692 0.869248 0.914613234 0.988566 3.191524
0.308146 0.311608 0.363117988 0.313192 0.284820083 0.266076 0.742445

17. Global Drug World
Inputs
Net Income 164497
Interest 25488
Tax Rate 0.3
Non cash Expense 56293
Fixed Expenses 143579
Change in WC 7325
Net Borrowing 27409
1 Calculation of FCFF for 2005
FCFF Net income+Int(1-T)+NCC-FC-Inc in WC
FCFF 95374
2 Calculation of FCFE for 2005
FCFE FCFF-Net Debt payment
FCFE 67965
3 Calculation of Sustainable growth rate
Sustainable growth rate Plowback ratio*Return on Equity
Plowback ratio(b) [Net Income-(Dividend per share*shares outst
ROE Net Income/Beginning of the year equity
Inputs
Dividend 82248.8 (Dividend per share*shares outsta
Total Equity 1019869
Sustainable growth rate 0.080646
4 Inputs
For 2005
Net Income 164497
Interest on Long term debt 20265
Other interest 5223
Total Interest 25488
Tax rate 30%
Interest (1-Tax) 17841.6

18. Depreciation 56293
Capex 143579
Working Capital change 7325
Net Borrowings 27409
FCFF for 2005 87727.6
FCFE for 2005 42477
5 Inputs
Per Share FCFF 0.19
G1 8%
Stable Growth 5%
Return on Equity 10%
WACC 7.5%
Tax rate 30%
per share FCFF
FCFE
PV
Value

19. 1-T)+NCC-FC-Inc in WC
Return on Equity
idend per share*shares outstanding)]/Net Income
nning of the year equity
end per share*shares outstanding)
Sales Growth 6%
For 2006 2005 2006 variance
Sales 4052173 4295303 243130
Expenses 3735397 3735397
Non cash Charges 56293 60000
Interest on long term Debt 20265 20265
Other interest 5223 5223
Income before income taxes 234995 474418

20. Less: Income tax 70499 142326
Net Income 164497 332093
Additional fixed capital 36470
Additional Working capital 24313
FCFF for 2006 349152
2005 2006 2007 2008
0.19 0.21 0.22
4.654
0.21 4.876
0.187 4.029
4.216

21. MWC Inc.
Growth EPS
Dividends 23920 G1 0.15 DEP
DPS 2.3 G- Stable 0.08 FI
No of shares 10400 NWC
Net debt proceeds
Cost of equity 13% FCFE
A. Calculation as per two-stage Dividend Discount model
2005 2006 2007 2008
DPS 2.3 2.65 3.04 3.29
65.70
2.65 68.74
PV 2.34 53.84
Value of share 56.18
B. Calculation as per two-stage FCFE approach
2005 2006 2007 2008
FCFE 2.42 2.78 3.20 3.46
69.11
2.78 72.31
PV 2.46 56.63
Value per share 59.09

22. 2.881
0.808
1.154
0.423
0.308
2.419

23. Telluride & Subsidiaries_Q.23
A. Growth Growth
G1 0.27 Common shares
G- Stable 0.13 Ke
Revenue
Net income
Depreciation
Chg in WC
FCInv
FCFE
Growth Rate
Earning per share
Depreciation
Working capital
FCInv
FCFE
Terminal value
Total cash flow to equity
PV
current value per share
B. Tax rate 30%
Growth 32% 13%
Earning per share 0.952
Dividend per share 0.286
Earning 1 1.257
Dividend 1 0.377
Earning 2 1.659
Dividend 2 0.498
Earning 3 1.874
Dividend 3 0.562
Years 0 1
Current value of a share (Vo) 0.331 0.383
Vo

24. Net income 80
Depreciation 23
Working capital 41
FCInv 38
FCFE 24 million

25. 0.13
84
0.14
2000 2001 2002 2003
598 759.46 964.51 1089.90
80 101.60 129.03 145.81
23 29.21 37.10 41.92
41 52.07 66.13 74.73
38 48.26 61.29 69.26
24 30.48 38.71 43.74
0.27 0.27 0.13
0.952 1.210 1.536 1.736
0.274 0.348 0.442 0.499
0.488 0.620 0.787 0.890
0.452 0.575 0.730 0.824
0.286 0.363 0.461 0.521
52.074
h flow to equity 0.363 52.534
0.318 40.424
value per share 40.742
Common shares 84 million
Ke 14.0%
2
56.232
43.269
43.982

26. Sundanci_Q.24
A. ii Calculation of ROE for the year 2000
Net Income
Beginning of the year equity
ROE
ROE
iii. Calculation of Sustainable rate of growth
Sustainable growth rate
b
Dividend per share
Share outstanding
Sustainable growth rate
Sustainable growth rate
B. a) An increase in in the quarterly dividend to 0 .15 per share
Quarterly dividend increases by 0.15 per share
So, yearly increase in dividend per share is 0.15*4=0.6
So, now the dividend per share is
Sustainable growth rate
b) Bond Issue of 25$ million, the proceeds of which would be used to increase pr
Issue of bond has nothing to do with sustainable growth rate. The proceeds of i
which in turn increases the value of the firm in terms of growth in share price. B
c) A 2-for-1 stock split
2-for -1 stock split indicates that the no.of outstanding shares increases by 2 tim

27. Now, the no. of outstanding shares
Now, the no. of outstanding shares
Sustainable growth rate
Both the no.of shares outstanding and increase in dividend has a direct impact
But the increase in the quarterly dividend has more impact on the growth rate.
In both the cases the growth rate has decreased.
1st Case
2nd Case
C.
i. The DDM uses a strict definition of cash flow to equity, i.e. the expected divide
ii. Both two-stage valuation model allow for two distinct phases of growth, initial

28. 80
674
Net Income/Beginning of the year Equity
0.118694
Plowback ratio* Return on equity
b*ROE
[Net Income-(Dividend per share*share outstandind)]/Net Income
0.286
84
b*ROE
0.08305
0.6+0.286 0.886
0.008273
uld be used to increase production capacity
wth rate. The proceeds of issue of bond increases the production
s of growth in share price. But it has no direct relation with sustainable growth rate.
ng shares increases by 2 times whereas the price per share decreases by half.

29. 84*2
168
0.047407
vidend has a direct impact on the sustainable growth rate.
mpact on the growth rate.
But the decrease is more in the 1st case, i.e in the increase in dividend.
Change in growth rate
90.04%
Change in growth rate
42.92%
ty, i.e. the expected dividends on the common stock. In fact, taken to its extreme, the DDM cannot be used to estimate the value of a sto
ct phases of growth, initial finite period where the growth rate is abnormal, followed by a stable growt period that is expected to last inde

31. n the increase in dividend.
sed to estimate the value of a stock that pays no dividends. The FCFE model expands the definition of cash flows to include the balance o
eriod that is expected to last indefinitely. These two-stage models share the same limitations with respect to the growth assumptions. 1

33. ash flows to include the balance of residual cash flows after all financial obligations are met. Thus, the FCFE model explicitly recognizes the
ect to the growth assumptions. 1) There, is a dufficulty of defining the duration of the extraordinary growth period. Eg: A longer period o

35. CFE model explicitly recognizes the firm's investment and financing policies as well as its dividend policy. In instances of a change of corpo
owth period. Eg: A longer period of high growth will lead to a higher valuation and there is a temptation to assume an unrealistically long

37. In instances of a change of corporate control and thereafter the possibility of changing dividend policy, the FCFE model provides a better
to assume an unrealistically long period of extraordinary growth. 2) The assumption of a sudden shift from high growth to lower, stable

39. the FCFE model provides a better estimate of value. The DDM is biased toward finding low P/E ratio stocks with high dividend yields to be
rom high growth to lower, stable is unrealistic. The transformation is more likely to occur gradually over a period of time. Given that the a

41. cks with high dividend yields to be undervalued. It is considered a conservative model in that it tends to identify fewer undervalued firms
r a period of time. Given that the assumed total horizon does not shift i.e. infinite, te timing of the shift from high to stable growth is a crit

43. identify fewer undervalued firms as market prices rise relative to fundamentals. The DDM does not allow for the potential tax disadvanta
rom high to stable growth is a critical determinant of the valuation estimate. 3) Because the value is quite sensitive to the steady-state g

45. w for the potential tax disadvantage of high dividends relative to the capital gains achievable from retention of earnings.
ite sensitive to the steady-state growth assumption, over or under estimating this rate can lead to large errors in value. The two models s

47. ntion of earnings.
errors in value. The two models share other limitations as well notably dufficulties in accurately forecasting required rates of return in de

49. sting required rates of return in dealing with the distortions that resulta from substantial or volatile debt-ratios and in accurately valuing a

51. t-ratios and in accurately valuing assets that do not generate any cash flows.

52. Sundanci_Q.25
A. The formula for calculating a price earnings ratio (P/E) for a stable growth firm is the dividend payout ratio
P/E on trailing earnings
P/E = [payout ratio (1 + g)]/(r g)
Growth 13%
Payout 30%
Cost of Equity 14%
P/E Ratio 33.9
P/E on next year's earnings
P/E Ratio 30.0
B.
The P/E Ratio is a decreasing function of riskiness. As risk increases, the P/E ratio decreases. Increases in the riskin

53. m is the dividend payout ratio divided by the difference between the required rate of return and the growth rate of dividends. If the P/E is
reases. Increases in the riskiness of Sundanci stock would be expected to lower the P/E. The P/E Ratio is an increasing function of growth

54. wth rate of dividends. If the P/E is calculated based on trailing earnings (year 0), the payout ratio is increased by the growth rate. If the P/E
s an increasing function of growth rate of the firm, thus higher the P/E ratio. Sundanci would command a higher P/E if analysts increases t

55. ased by the growth rate. If the P/E is calculated based on next year’s earnings (year 1), the numerator is the payout ratio.
a higher P/E if analysts increases the expected growth rate. The P/E ratio is a decreasing function of the market premium. An increased m

56. the payout ratio.
market premium. An increased market risk premium increases the required rate of return, lowering the price of a stock relative to its earn

57. price of a stock relative to its earnings. A higher risk premium would be expected to lower Sundanci's P/E ratio.

58. Jones Group Inc.
Calculation of FCFF of Jones Group Inc. & D.Com Corp.
Q.1 WACC 0.17
A. Tax Rate 0.3
2000 2001 2002 2003
EBIT 304.55 251.23 267.98 308.02
Depr & Amor 504 654 751 849
Capex 1000 650 650
Change in WC -3.92 -15.16 -18.41
EBIT(1-T) 175.861 187.586 215.614
FCFF -166.219 303.746 433.024
FCFF -166.219 303.746 25331.9
PV in 2000 -142.068 221.8906 15816.49
Value 15896.32
D.Com Corp.
A. WACC 0.17
Tax Rate 0.3
2000 2001 2002 2003
EBIT 29.45 69.68 47.51 10.52
Depr & Amor 69 129 136 144
Capex 400 50 50
Change in WC 5.19 -4.32 -6.47
EBIT(1-T) 48.776 33.257 7.364
FCFF -227.414 123.577 107.834
FCFF -227.414 123.577 6308.289
PV in 2000 -194.371 90.27467 3938.71
Value 3834.614

59. B.
SOTP is Sum of the parts valuation. D.Com Corporations contribution towards the whole of
Q.3 Calculation of Sustainable Growth Rate of Jones Group Inc.for the year 2003
A. 2003
PAT 122.69
Equity 1475.16
ROE = PAT/Equity 0.083171
Net Income 122.69
Dividend 88.18
Dividend Payout Ratio 0.718722
Retention Ratio = (b) 0.281278
Sustainable Growth Rate 2.34%

60. Growth till infinity 0.15
PV in 2003 24898.88
Growth till infinity 0.15
PV in 2003 6200.455

61. ution towards the whole of Jones Group would be approximately 24%
the year 2003