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CMA Final · Strategic Performance Management and Business Valuation · Laws and Compliance in Business Valuation

Case: Meera Pharma Ltd, an unlisted company, issues shares to a promoter on a preferential basis. A registered valuer values the shares at ₹250 each using the DCF method. Maintainable post-tax cash flow in the terminal year is ₹60 crore, growing at 5% perpetually, discounted at 15%. Terminal value at the end of the explicit period using the Gordon model on next year's cash flow (the ₹60 crore is the cash flow of the next year) is required. What is the terminal value?

Terminal value is ₹600 crore, found by dividing the next year's cash flow of ₹60 crore by the difference between the 15% discount rate and 5% growth, which is 10%. Dividing by 15% alone ignores growth and gives ₹400 crore, which is wrong.

  1. A₹400 croreCorrect
  2. B₹420 crore
  3. C₹600 crore
  4. D₹300 crore

Explanation

Terminal value = CF next year / (r − g) = 60 / (0.15 − 0.05) = 60 / 0.10 = ₹600 crore. Since the data says the ₹60 crore is already next year's flow, no growth uplift is applied. Option 420 is wrong from using 0.15 − 0.05 incorrectly with other bases, and 400 is 60/0.15, which ignores growth.

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