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CS Professional · Corporate Restructuring, Valuation and Insolvency · Valuation of Business and Assets for Corporate Restructuring

Kaveri Foods Ltd is expected to generate a steady free cash flow to the firm of Rs 12 crore every year in perpetuity, with no growth. Its appropriate discount rate (WACC) is 12%. It has net debt of Rs 30 crore. Under the discounted cash flow approach, what is the equity value?

Equity value is Rs 70 crore. The perpetual cash flow of Rs 12 crore capitalised at 12% gives an enterprise value of Rs 100 crore, and deducting net debt of Rs 30 crore leaves the value attributable to equity shareholders.

  1. ARs 70 croreCorrect
  2. BRs 100 crore
  3. CRs 130 crore
  4. DRs 114 crore

Explanation

Enterprise value of a zero-growth perpetuity = 12 / 0.12 = Rs 100 crore. Equity value = enterprise value less net debt = 100 - 30 = Rs 70 crore. Rs 100 crore forgets to deduct net debt, and Rs 130 crore adds it instead.

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