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

Case: Sundaram Auto Components Ltd (SACL) is being valued for acquisition by Veda Motors Ltd. SACL expects free cash flow to firm (FCFF) of Rs 60 crore next year, growing at 5% per year in perpetuity. Its WACC is 11%. SACL has debt of Rs 200 crore and surplus cash of Rs 20 crore. What is the equity value of SACL using the constant-growth FCFF model?

Equity value is Rs 820 crore. Enterprise value is FCFF of 60 divided by WACC minus growth (6%), giving Rs 1,000 crore. Subtracting debt of Rs 200 crore and adding surplus cash of Rs 20 crore converts enterprise value into equity value.

  1. ARs 780 crore
  2. BRs 820 croreCorrect
  3. CRs 980 crore
  4. DRs 1,000 crore

Explanation

Enterprise value = 60/(0.11-0.05) = Rs 1,000 crore. Equity value = EV - debt + surplus cash = 1,000 - 200 + 20 = Rs 820 crore. Rs 780 crore wrongly deducts cash instead of adding it; Rs 980 crore deducts no debt but adds cash incorrectly, and Rs 1,000 crore is the EV only.

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