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CS Professional · Corporate Restructuring, Valuation and Insolvency · Overview of Business Valuation

Kaveri Pharma Ltd is expected to generate free cash flows of Rs 110 lakh next year, growing at a steady 5% a year forever. The discount rate is 15%. Using the constant-growth (Gordon) perpetuity approach, what is the enterprise value?

The enterprise value is Rs 1,100 lakh. Under the constant-growth perpetuity method, value equals next year's free cash flow divided by the discount rate minus the growth rate, which is 110 divided by 10%.

  1. ARs 1,100 lakhCorrect
  2. BRs 733 lakh
  3. CRs 770 lakh
  4. DRs 2,200 lakh

Explanation

Value = next year's FCF / (r - g) = 110 / (0.15 - 0.05) = 110 / 0.10 = Rs 1,100 lakh. Check: 1,100 x 0.10 = 110. Rs 733 lakh results from dividing by r alone (110/0.15), ignoring growth.

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