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CMA Final · Strategic Performance Management and Business Valuation · Business Valuation Methods and Approaches

Kaveri Foods is expected to generate free cash flow to the firm of Rs 20 crore next year, growing at 5% perpetually. Its weighted average cost of capital is 13%. Net debt is Rs 40 crore. Using the constant growth model, what is the equity value?

Equity value is Rs 210 crore. Enterprise value by the growing perpetuity formula is 20 divided by (13% minus 5%), which is Rs 250 crore. Deducting net debt of Rs 40 crore gives equity value. Stopping at Rs 250 crore would wrongly treat debt as belonging to shareholders.

  1. ARs 210 croreCorrect
  2. BRs 250 crore
  3. CRs 154 crore
  4. DRs 160 crore

Explanation

Enterprise value = 20 / (0.13 - 0.05) = 20 / 0.08 = Rs 250 crore. Equity = 250 - 40 = Rs 210 crore. Rs 250 crore forgets to deduct net debt.

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