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CMA Final · Strategic Performance Management and Business Valuation · Fundamentals of Business Valuation

Kaveri Pharma expects free cash flow to firm of Rs 50 lakh next year, growing at 5% a year forever. Its WACC is 15%. It has debt of Rs 130 lakh and no surplus cash. The equity value is:

Equity value is Rs 370 lakh. The constant-growth model gives firm value of 50 divided by 10% (15% minus 5%), which is Rs 500 lakh. Deducting debt of Rs 130 lakh to reach the equity claim leaves Rs 370 lakh.

  1. ARs 370 lakhCorrect
  2. BRs 500 lakh
  3. CRs 333 lakh
  4. DRs 238 lakh

Explanation

Firm value = FCFF1 / (WACC - g) = 50 / (0.15 - 0.05) = Rs 500 lakh. Equity = 500 - 130 = Rs 370 lakh. Rs 500 lakh forgets to subtract debt; Rs 333 lakh uses 50/0.15 ignoring growth.

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