CWA ICWA Final - Group IV : Business Valuation Management - June 2011

CWA ICWA Final - Group IV • Business Valuation Management • June 2011

This Paper has 37 answerable questions with 1 answered.

F—P18(BVM) Syllabus 2008
Time Allowed : 3 Hours	Full Marks : 100

The figures in the margin on the right side indicate full marks.
Answer Question No. 1 which is compulsory carrying 25 marks and any five from the rest.
Marks

The figures in the margin on the right side indicate full marks.

Answer Question No. 1 which is compulsory carrying 25 marks and any five from the rest.

Marks

(a)

State whether the following statements are true or false:

1x5=5

(i)

Organizational Capital structure is a primary component of intellectual capital.

(1)

(ii)

A Brand is nothing but a glorified product name, hence it has no value.

(0)

(iii)

Existence of strong form of market efficiency required a well developed strong exhange network.

(0)

(iv)

What matters in the valuation of a business is timings of profit and not the timings of cash flows?

(0)

(v)

Under DCF mode of asset valuation, we need to estimate the cash flows during the life of the asset.

(0)

(b)

Fill in the blanks by using the words/phrases given in the brackets:

1x10=10

(i)

_____________ serves as a measure of a firm’s external performance. (Market value Added/EVA)

(0)

(ii)

Under ___________ approach, value is determined by comparing the subject company or asset with other companies and assets in the same industry or the same size, based on some common economic variables. (Relative Valuation/Contingent Claim Valuation)

(0)

(iii)

In DCF valuation, the value of an asset is present value of __________ cash flows on the asset. (actual/expected)

(0)

(iv)

Premium paid by a target company to buy back its stock from a potential acquirer is called__________. (Green mail/White Knight)

(0)

(v)

___________ is a method used to value intangibles in which the value of an intangible is equal to all future royalties that would have to be paid for the right to use the asset if it were not acquired. (Discounted Cash Flow method/Relative Royalty method/Relief from Royalty method)

(0)

(vi)

If any fixed asset is retired from active use and held for disposal, it should be valued at the lower of net book value and _________. (realisable value/net realisable value)

(0)

(vii)

If prices are rising, FIFO method of inventory valuation gives a _______________ value of ending inventory. (better/bad)

(0)

(viii)

Two stage dividend discount model is based on_____________. (High & Low growth/High & stable growth)

(0)

(ix)

Rate of return in preference shares is generally __________ because of greater safety. (Higher/Lower)

(0)

(x)

Patents are normally written off over their legal term of validity or over their working life whichever is ____________.(shorter/greater)

(0)

(c)

In each of the questions given below, one out of the four options is correct, Indicate the correct answer:

2x5=10

(i)

An anti takeover defense that creates securities that provide their holders with special rights in the event of a takeover is called

(A)	White Knight
(B)	Poison Put
(C)	Poison Pill
(D)	Bear Hug

(0)

(ii)

The following approach states that value of a firm is unaffected by its dividend policy

(A)	CAPM approach
(B)	Modigliani—Miller approach
(C)	Walter’s Valuation model
(D)	None of the above

(0)

(iii)

If the company has a P/E Ration of 12 and a ROE of 13% then its Market to Book Value Ration will be

(A)	1.56
(B)	9.34
(C)	1.09
(D)	None of the above.

(0)

(iv)

Which one of the following is not a valid assumption of the Modigliani and Miller Model of Dividend policy?

(A)	There are no stock floatation or transaction cost
(B)	Stocks are divisible
(C)	There are no arbitrage opportunities in the market
(D)	There is asymmettic information between the managers and investors

(0)

(v)

If the Current Yield of a bond is more than its yield to maturity, then a bond is trading at —

(A)	Par
(B)	At discount
(C)	At premium
(D)	Nothing can be said about the prices of bond as information is not complete

(0)

(a)

Discuss the cause of horizontal and vertical mergers.

(0)

(b)

Discuss the major aspects, assumptions and decision rules of the discounted cash flow model.

(0)

(a)

M/s Radha Industries is planning to issue a Bonds series on the following terms—
Face value Rs.100
Terms of maturity 10 years
Yearly Coupon Rate.

Years	Rate
1–4 5–8 9–10	9% 10% 14%

The current market rate of similar bonds is 15% per annum. The company proposes to price the issue in such a manner that it can yield 16% compounded rate of return to the investors. The Company also proposes to redeem the bonds at 5% premium on maturity. You are required to determine the issue price of the bonds:

Year	1	2	3	4	5	6	7	8	9	10
P.V. factor of Re. 1 @ 16%	0.862	0.743	0.641	0.552	0.476	0.410	0.354	0.305	0.263	0.227

(0)

(b)

When will Economic Value Added of a Company increase?

(0)

Write Short Notes any three:

5x3=15

(i)

Characteristic of Brand;

(0)

(ii)

Valuation of Preference shares;

(0)

(iii)

Fair Market Value of Intangible assets;

(0)

(iv)

Mckinsey Model of maximizing the value of a firm;

(0)

(v)

Walter’s Valuation Model;

(0)

(a)

Google Ltd. wants to acquire Froogle Ltd. and has offered a swap ratio of 1:2 (0.5) shares of Google Ltd. for every one share of froogle Ltd. Following Information is provided:

	Google Ltd.	Froogle Ltd.
Profit After Tax	Rs. 18,00,000	Rs. 3,60,000
Equity Shares Outstanding	6,00,000	1,80,000
EPS	Rs.3	Rs.2
P/E Ratio	10 times	7 times
Market price per share	Rs. 30	Rs. 14

Require:

(i)	The number of equity shares too be issued by Google Ltd. for acquisition of Froogle Ltd.
(ii)	What is the EPS of Google Ltd. after acquisition?
(iii)	What is the expected market price per share of Google Ltd. after the acquisition, assuming Its P/E multiple remains unchanged?
(iv)	Determine the market value of the merged firm.

(0)

(b)

Explain the various methods of payment in case of mergers and amalgamations.

(0)

(a)

ABC Limited provides you with following figures;

Profit before interest and tax
Less: Interest on debentures @ 12%
Profit Before Tax
Income Tax @ 40%
Profit After Tax
Number of Equity Shares (Rs. 10 each)(Numbers)
Ruling Price in the market (Rs.) per share

Amount in Rs.
50,00,000
6,00,000
44,00,000
17,60,000
26,40,000
4,00,000
66

The company has undistributed reserves of Rs. 60,00,000. The company needs Rs. 1,20,00,000 for expansion. This amount will earn the same rate as Return on Capital Employed on existing capital. In view of current boom in the capital markets company management has decided to raise 100% of the total financing requirements externally.You are informed that a debt equity ratio [(Debt/Debt + Equity)] higher than 35% will push PE ratio down to 8 and raise the interest rate on additional amount borrowed to 14% due to the increased financial risk profile of the company. You are required to ascertain the probable price of the share:

(i)	If additional funds are raised as debt; and
(ii)	If the amount is raised by issuing equity shares assuming that new shares will be issued at Rs. 60 per share and Price Earnings Ratio will remain unchanged.

(0)

(b)

Assume that you have been given the task of estimating the value of Goodwill of Sunshine Ltd. based on the method of Capitalization of Excess Earnings Power. For that purpose, the necessary information is being collected for the said company and a typical firm of the same industry as given below:

Profit and Loss Accounts for the year ending on 31.03.2011 (Rs. in Lakhs)
Particulars	Sunshine Ltd.	Typical Company of the Industry
Sales less: Cost of Goods Sold	625.00 497.00	438.68 373.80
Gross Profit depreciation	128.00 64.80	64.88 45.60
Profit Before Interest and Tax Interest	63.20 7.80	19.28 7.00
Profit Before Tax Tax @ 40%	55.40 22.16	12.28 4.91
Profit After Tax	33.24	7.37

Additional Information:

•	The appropriate discount rate is 10% and
•	The estimated life for which goodwill is to be calculated is 10 years.
•	The present value of Annuity of Re. 1 every year, at 10% discount rate for 10 years is Rs. 6,145.
	Assuming that the estimated excess earnings will remain constant throughout the time period for which goodwill is to be estimated, you are required to determine the value of Goodwill of Sunshine Ltd. using the method of capitalization of excess earnings power.

(0)

(a)

Briefly explain various popular approaches to intellectual capital measurement.

(0)

(b)

VASUDA Ltd. is a major player in the Textile industry of the country. The Industry is expected to maintain high growth for a period of 5 years after which it is expected to drop down. Currently the company is distributing 40% of its profit as dividend to the shareholders.

The dividend payout ratio of the company is expected to remain at the current level for a period of next 5 years after which it is expected to increase to 55%.

The net profit marginof the company is currently 8% and is expected to remain at the same level for next 5 years, after which it is expected to decrease to 5.7%.

Currently the company is able to generate sales of Rs. 2.50 for every 1 (one) rupee of assets employed and it is expected to remain the same for the next 5 years and after that the company is expected to generate sales f Rs. 3,50 for every 1 (one) rupee of assets employed.

50% of the assets of the company are financed with equity capital, and it is expected to remain same in future.

At present the risk free rate of return is 7% and market risk premium is 15.50%. The beta of the company is currently 1.2.

Current net worth of the company is Rs. 250 lakh and number of shares outstanding is 2 lakh.

Note: The Market is inequilibrium.

You are required to compute:

(i)	Price per share of VASUDA Ltd. using Dividend discount model (DDM)
(ii)	Price to book value ratio of the share of VASUDA Ltd.

P.V.FACTORS ARE AS UNDER:-

Year	1	2	3	4	5	6	7	8	9	10
@ 15.50%	0.8658	0.7496	0.6490	0.5619	0.4865	0.4212	0.3647	0.3158	0.2734	0.2367
@ 22.50%	0.8163	0.6664	0.5440	0.4441	0.3625	0.2959	0.2416	0.1972	0.1610	0.1314
@ 25.60%	0.7962	0.6339	0.5047	0.4018	0.3199	0.2547	0.2028	0.1615	0.1286	0.1024

(0)

(a)

DKB Consulting Ltd. is a firm that specializes in offering management consulting services to software companies.
DKB Consulting Ltd. reported operating income (EBIT) Rs. 204 lakh and net income of Rs. 90 lakh in the most recent years. However, the firm’s expenses include the cost of recruiting new consultants and cost of training which amount to rs. 40 lakh. A consultant who joins DKB Consulting Ltd. stays with the firm on an average for 4 years.

Recruitment and training expenses are amortizable over 4 years immediately following the year in which they are incurred. Over the past 4 years the expenses are:

Year	Training, recruitment Expenses (Rs. in lakh)
Current (0)	40
Year (−1)	32
Year (−2)	30
Year (−3)	24
Year (−4)	20

Assuming a linear amortization schedule (over 4 years).
You are required to estimate:

(i)	The value of human capital asset and the amount of training and recruitment expenses amortization for this year.
(ii)	The adjustment to operating income.

(0)

(b)

NABINA UDYOG LTD.,a venture capital fund, has specialized in providing bridge finance to young technocrats in biotechnology sector. NABINA UDYOG has received an investment proposal from AKRIT BIOTECH LTD. a Bio–tech firm, to finance its recent project with equity investment of Rs. 15 crore. AKRIT BIOTECH LTD. is an existing profit making organization with a dividend track record of 3 years. The current EPS of the company is Rs. 5. The expected growth in EPS for the next year is as follows:

Growth in EPS(%) 0	Probability 0.20
25	0.30
35	0.40
40	0.10

NABINA UDYOG reckons that the P/E ratio for this industry will be as follows:

P/E Ratio 8	Probability 0.30
10	0.40
12	0.30

NABINA UDYOG finances every project for 1 year. The company (NABINA UDYOG) invests only in those projects where probability of getting target return of 35% is at least 75%. NABINA UDYOG is expected to dispose of its investment at Industry P/E ratio.

Required
What should be the price at which NABINA UDYOG LTD. would make the investment?

(0)

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