Sfm final doubts

Final 1992 views 11 replies

n k abhiram

CA Final CS Final

629 Points Joined April 2010

1. A Company passes through three stages: growth, transition and maturity stage. The growth stage is expected to last for 2 years, while the transition stage lasts for 3 years. During the transition stage the growth rate of dividends changes from 18% to 9%. What would be the rate of dividend at the end of the first year of the transition stage? (5 Marks) (November 2010) (M)

How this question is solved ?

	For the year ended March 31, 2014
Revenues	` 7,500 Crores
Cost of Goods Sold (COGS)	` 3,000 Crores
Operating Expenses	` 2,250 Crores
Capital Expenditure	` 750 Crores
Depreciation (included in COGS & Operating Expenses)	` 600 Crores

During high growth period, revenues & Earnings before Interest & Tax (EBIT) will grow at 20%

p.a. and capital expenditure net of depreciation will grow at 15% p.a. From year 4 onwards,

i.e. normal growth period revenues and EBIT will grow at 8% p.a. and incremental capital expenditure will be offset by the depreciation. During both high growth & normal growth period, net working capital requirement will be 25% of revenues.

The Weighted Average Cost of Capital (WACC) of WXY Ltd. is 15%. Corporate Income Tax rate will be 30%.

Required:

Estimate the value of WXY Ltd. using Free Cash Flows to Firm (FCFF) & WACC methodology. The PVIF @ 15 % for the three years are as below:

*Year*	t1	t2	t3
*PVIF*	0.8696	0.7561	0.6575

Answer

Determination of forecasted Free Cash Flow of the Firm (FCFF)

(8 Marks) (May 2014)

(` in crores)

	Yr. 1	Yr. 2	Yr 3	Terminal Year
Revenue	9000.00	10800.00	12960.00	13996.80
COGS	3600.00	4320.00	5184.00	5598.72
Operating Expenses	1980.00	2376.00	2851.20	3079.30
Depreciation	720.00	864.00	1036.80	1119.74
EBIT	2700.00	3240.00	3888.00	4199.04
Tax @ 30%	810.00	972.00	1166.40	1259.71
EAT	1890.00	2268.00	2721.60	2939.33
Capital Exp. – Dep.	172.50	198.38	228.13	-
∆ Working Capital	375.00	450.00	540.00	259.20
Free Cash Flow (FCF)	1342.50	1619.62	1953.47	2680.13

how this is computed ?

Thanks in advance

Replies (11)

Manikanth

Chartered Accountant

342 Points Joined October 2012

Hi For getting FCF, working capital investment made during the year should also be deducted i.e.. here in yr 1 the amount 375 crs representing increase in working capital (closing wc - opening wc) i.e [ 2250 (9000*25%) - 1875 (7500*25%) ]. Calculate same for the remaining yr's also.

n k abhiram

CA Final CS Final

629 Points Joined April 2010

Got it thanks manikanth . Any idea about 1st question

Sheetal Jain

894 Points Joined November 2011

Solution is on page no.57 of the attachment

I think it is not in new syallbus as it is of Nov 2010 paper.

n k abhiram

CA Final CS Final

629 Points Joined April 2010

I found the answer book but don't know how they have solved

Manikanth

Chartered Accountant

342 Points Joined October 2012

For 1Q) Here assume the dividend changes from 18% to 9% from 3rd year onwards (i.e from 1st year of transition stage) and further assume that divided in yr 1 is Re.1 So, divided at the end of 1st year of transition period is 1*(1.18)*(1.18)*(1.9) = 1.52 i.e..dividend is increasing year by year in proportion of growth.

Manikanth

Chartered Accountant

342 Points Joined October 2012

# 1*(1.18)*(1.18)*(1.09) = 1.52

n k abhiram

CA Final CS Final

629 Points Joined April 2010

THANKS A LOT MANIKANTH & SHEETAL

courageous Aries

263 Points Joined January 2010

The question says that during the transtion stage there is change in dividened from 18% to 9%, We interpretate this line has "during three years it changes by 9% i.e in three years it changes by 9%. So we assume that each year the change is 3%(for simplicity purpose) we also assume that current dividend is Re 1. so our answer would be

1(1.18)(1.18)(1.03)= 1.434(approx)