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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Kaveri Foods Ltd (acquirer) plans to buy Malabar Spices Ltd. Malabar's expected free cash flow to firm next year is ₹12 crore, growing at 5% perpetually. Its WACC is 12%. Malabar has debt of ₹30 crore and cash of ₹6 crore. What is the equity value of Malabar using the constant growth FCFF model?

Equity value is about ₹147 crore. Enterprise value is FCFF of ₹12 crore divided by WACC minus growth (7%), giving about ₹171 crore. Deducting debt of ₹30 crore and adding cash of ₹6 crore gives roughly ₹147 crore for shareholders.

  1. A₹147 croreCorrect
  2. B₹171 crore
  3. C₹123 crore
  4. D₹153 crore

Explanation

Enterprise value = 12/(0.12-0.05) = ₹171.43 crore, approximately 171. Equity = EV - debt + cash = 171.43 - 30 + 6 = 147.43, approximately ₹147 crore. Option ₹171 crore ignores net debt, ₹123 crore subtracts cash and debt incorrectly (EV-30-6... mis-signing cash gives 135, and 123 deducts 48), and ₹153 crore deducts only debt without adding cash... actually 171-30=141; 153 is not derived from correct net debt treatment.

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