CA Final · Advanced Financial Management · Security Valuation
Narmada Infra Ltd expects FCFF of ₹100 crore in year 1 and ₹120 crore in year 2. From year 3 onwards FCFF will grow at 5% per annum forever. WACC is 10% and net debt is ₹400 crore. What is the value of equity, to the nearest crore?
Equity value is about ₹1,873 crore. The terminal value at the end of year 2 is 120 × 1.05 / 0.05 = 2,520. Discounting year 1 cash flow, year 2 cash flow and terminal value gives a firm value of ₹2,272.73 crore. Deducting net debt of ₹400 crore leaves ₹1,872.73 crore.
- A₹1,873 croreCorrect
- B₹1,774 crore
- C₹2,081 crore
- D₹2,273 crore
Explanation
Terminal value at the end of year 2 = 120 × 1.05 / (0.10 - 0.05) = ₹2,520 crore. PV = 100/1.1 + (120 + 2,520)/1.21 = 90.91 + 2,181.82 = ₹2,272.73 crore. Equity value = 2,272.73 - 400 = ₹1,872.73 crore, or about ₹1,873 crore. Discounting the terminal value by only one year gives ₹2,081 crore. Not deducting net debt gives ₹2,273 crore.
Did you get it right without looking?
One question tells you little. A timed set on Security Valuation shows your real accuracy, how long you take and where you lose marks.
More Security Valuation questions
- A bond priced at ₹1,000 has a Macaulay duration of 4.2 years and a yield to maturity of 5% per annum (annual compounding). Using modified du…
- Kaveri Textiles bonds have a face value of ₹1,000, a 9% annual coupon and 5 years to maturity, redeemable at par. The bond currently trades …
- Which statement about an upward-sloping yield curve is correct according to the liquidity preference theory?
- A 6-year zero-coupon bond is trading in the market at a yield to maturity of 8% per annum. What is its Macaulay duration?
- A 9% annual-coupon bond of face value ₹1,000 is quoted at ₹920 and will be redeemed at par after 5 years. Using the approximate yield to mat…
- Kaveri Foods Ltd expects EPS of ₹20 and earnings growth of 15% a year. Comparable listed firms trade at an average PEG ratio of 1.2 (P/E div…