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CMA Final · Strategic Performance Management and Business Valuation · Valuation in Mergers and Acquisitions

Target Ltd has expected free cash flow to firm of Rs 90 crore next year, growing at 5% forever. The WACC is 14%. Target has debt of Rs 200 crore and cash of Rs 50 crore. What is the equity value using the constant growth DCF approach?

Equity value is Rs 850 crore. Enterprise value is 90 divided by 9%, which is Rs 1,000 crore. Subtracting debt of Rs 200 crore and adding surplus cash of Rs 50 crore gives the value attributable to shareholders.

  1. ARs 850 croreCorrect
  2. BRs 800 crore
  3. CRs 1,000 crore
  4. DRs 1,050 crore

Explanation

Enterprise value = 90 / (0.14 - 0.05) = Rs 1,000 crore. Equity = 1,000 - 200 debt + 50 cash = Rs 850 crore. Rs 800 crore ignores cash; Rs 1,000 crore is enterprise value.

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