Application
of the valuation model on ABC ltd.
The
following example relates to the valuation of ABC ltd. under
the assumption of temporal super normal growth followed by
a period of no growth. The formula used is given below:
n
(1+gs)t X0(1-T)
(1+gs)n+1
V0
= X0 (1-T) (1-bs) S
-------------
+
--------------------------
t =1
(1+k)t
k (1+k)n
Where,
V0
= Total firm value [value of equity (S) plus Debt
(B)]
X0
= EBIT or NOI
T
= Tax rate
b
= Investment rate
r
= Profit rate
g
= Growth rate
k
= Cost of capital
N
= Growth period
The
various key parameters in terms of data and projections are
given under two scenarios:
Here,
growth rate in EBIT is 15% per year, investment rate (b) is
50%, tax rate (T) is 34%, profit rate (r) is 30%, growth period
(N) is 10 years, and cost of capital (k) is 10%.
The
calculation of valuation is as follows:
10
(1+ 0.15) 946
(1-0.34)
1.15
V0 = 946 * (1- 0.34) (1- 0.5) S
------------
+ --------------- (--------) (1.15)
t=
1
(1+0.10)
0.10 1.10
V0
= Rs. 4,019 + Rs. 11,199 = Rs.15,218
Under
pessimistic scenario, the growth rate “g” in earnings (EBIT)
is reduced to 13% per year, Profit rate “r” =
26% , cost of capital “k” = 11%
and
other assumptions are same.
The
calculation of valuation is as follows:
10
(1+ 0.13)
946 (1-0.34)
1.13
V0 = 946 * (1- 0.34) (1- 0.5) S
------------ + --------------- (--------) (1.13)
t = 1
(1+0.11)
0.11
1.11
V0
= Rs. 3,449 + Rs. 7,668 = Rs.11,116
Valuation
items
|
Optimistic
method
|
Pessimistic
method
|
|
First
term EBIT
|
Rs.
4,020 Crores
|
Rs.
3,500 Crores
|
|
Second
term EBIT
|
Rs.11,200
Crores
|
Rs.
7,800 Crores
|
|
Value
of firm
|
Rs.15,220
Crores
|
Rs.11,300
Crores
|
|
Less:
Total debt
|
Rs.
630 Crores
|
Rs.
630 Crores
|
|
Value
of equity
|
Rs.
14,590 Crores
|
Rs.
10,670 Crores
|
|
Number
of shares
|
150
Crores
|
150 Crores
|
|
Value
per share
|
Rs.
97.27
|
Rs.
71.13
|
|
