Discount Cash Flow (DCF) Approach
Q1
The following balance sheet for the current year is provided as under
Liabilities Amount Assets Amount
Equity funds (Rs.100 each) 2,00,000 Current assets 25,000
12% Debt 1,50,000 Long term assets(net) 3,25,000
3,50,000 3,50,000
Its expected sales revenue for the next 4 years are as under
Year sales revenue (Rs.)
1 2,80,000
2 3,50,000
3 3,30,000
4 4,60,000
The expenses for the 4 years are as under:
1. Variable cost -30% of sale revenue.
2. Fixed cash are estimated to be Rs. 25,000 per year for the first 2 years and at
Rs. 40,000 for the next 2 years.
3. The company has planned the following (assumed to have been incurred in the
beginning of each year) for the next 4 years.
Year 1 50,000
Year 2 75,000
Year 3 1,00,000
Year 4 1,50,000
4. Long term assets are subjected to 10% rate of depreciation on diminishing
balance method.
5. Working capital in terms of investment in current assets are estimated at 10% of
sales revenue.
6. The amount of debt to be repaid annually @10% (assumed at the end of the
year).
7. The effective tax rate is 30%.
8. The free cash flow of the firms are expected to grow at 5% annum, after 4 years.
9. WACC-15%.
10. Determine the discounted cash flow (DCF) value of the a. firm and b. equity
Q2
Sagar industries deals in production and sales of consumer durables. Its condensed
balance sheet as on 31st March, current year is as follows:
Liabilities Amount Assets Amount
Equity funds 1,65,000 Long term assets (net) 2,65,000
12% Debts 1,20,000 Current assets 70,000
Current liabilities 50,000
3,35,000 3,35,000
Its expected sales revenue for the next 8 years are given in the table:
Year sales revenue
1 1,20,000
2 150,000
3 225,000
4 3,30,000
5 4,50,000
6 3,90,000
7 3,45,000
8 3,00,000
Additional information
a. Its variable expenses will amount to 40% of sales revenue. Fixed cash operating
costs are estimated to be ₹24,000 per year for the first 4 years and at ₹30,000
for years 5-8. In addition, an extensive advertisement campaign will be launched,
requiring annual outlays as follows:
1 8,000
2-3 23,000
4-6 45,000
7-8 15,000
b. Long term assets are subject to 15% of rate of depreciation on diminishing
balance method.
c. The company has planned the following (assumed to have been incurred in the
beginning of each year) for the next 8 years.
Year 1 8,000
2 12,000
3 30,000
4 38,000
5 53,000
6 38,000
7 23,000
8 15,000
d. Current assets are estimated at 20% of sales revenue and current liabilities are
expected to grow by 2% every year.
e. It is expected to have non-operating assets in terms of investments in marketable
securities in the initial year. The expected after tax con-operating cash flow in
year 1=2,750 and year 2 = 1,500.
f. Given tax benefits available to Sagar, the effective tax rate estimated is 30%.
g. The corporate equity capital is estimated at 16%.
h. The free cash flow of the firm is expected to grow at 5% p. a, after 8 years.
Determine the Discounted Cash Flow (DCF) value of the 1. Firm and 2. Equity.
