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

Sunrise Textiles Ltd expects free cash flow to firm (FCFF) of ₹120 lakh next year, growing at 5% per annum forever. Its WACC is 13%. The market value of its debt is ₹300 lakh. Using the perpetuity growth method, the value of equity is:

Firm value is 120 divided by 8 percent, which equals ₹1,500 lakh. Deducting debt of ₹300 lakh gives equity value of ₹1,200 lakh. FCFF is discounted at WACC to get enterprise value, so debt must be subtracted to reach equity.

  1. A₹1,200 lakh
  2. B₹900 lakhCorrect
  3. C₹1,500 lakh
  4. D₹600 lakh

Explanation

Firm value = 120/(0.13 − 0.05) = 120/0.08 = ₹1,500 lakh. Equity value = firm value − debt = 1,500 − 300 = ₹1,200 lakh. Check: 1,200 + 300 = 1,500. The option ₹1,500 lakh ignores debt deduction.

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