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Sfm final doubts

n k abhiram (CA Final , CS Final ) (629 Points)

17 October 2015  

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 ?

2. 

 

 

 

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

 

 


 11 Replies

Manikanth (Chartered Accountant) (342 Points)
Replied 17 October 2015

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)
Replied 18 October 2015

Got it thanks manikanth . Any idea about 1st question

Sheetal Jain (.) (869 Points)
Replied 18 October 2015

Solution is on page no.57 of the attachment

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


Attached File : 691280 20151018122932 34687compilerfinal sfm n03n13 cp6.pdf downloaded: 193 times

n k abhiram (CA Final , CS Final ) (629 Points)
Replied 18 October 2015

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

Manikanth (Chartered Accountant) (342 Points)
Replied 18 October 2015

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)
Replied 18 October 2015

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

n k abhiram (CA Final , CS Final ) (629 Points)
Replied 18 October 2015

THANKS A LOT MANIKANTH & SHEETAL

courageous Aries ( ) (263 Points)
Replied 19 October 2015

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)

courageous Aries ( ) (263 Points)
Replied 21 October 2015

Sorry I made a mistake in above question.. Third year rate would be 1.15(1.18-0.03) So rate of dividend wld be 1(1.18)(1.18)(1.15)= 1.60

vamshi (student) (5 Points)
Replied 05 June 2017

Dear sir,

 

​I have a doubt in SFM problem,

 how 

​"​

cost of long term fund invested in debtors

​"​

 is calculated in solution image 

​I​

 mean Rs 943.8 crores and Rs 882.42 crores for recourse/non recourse options under fine bank proposal

thank u advance

 

 

​Regards,

 

vamshi


Attached File : 623103 20170605132058 new doc 2 1.jpg downloaded: 50 times

Sheetal Jain (.) (869 Points)
Replied 08 June 2017

With Recourse

((1100-((1100-27.50)*88%))0.15*30/365)

Without Recourse

((1100-((1100-49.50)*84%))0.15*30/365)

 


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