1. Creating Value for shareholders
A.V. Vedpuriswar
January 3, 2018

2. What determines the value of a firm?
The value of a firm can generally be considered a function of four key inputs:
Cash flow from assets in place or investments already made
Expected growth rate in cash flows during a period of high growth excess returns
Time before stable growth sets in and excess returns are eliminated
Discount rate which reflects both the risk of the investment and the financing mix used by the firm

3. What can a firm do to increase its value?
Generate more cash flows from existing assets
Grow faster or more efficiently during the high growth phase
Prolong the high growth phase
Lower the cost of capital

4. Accounting vs Economic Value

5. Accounting vs Economic profit
A company uses $ 200 mn of capital, $ 100 mn in equity and $100 mn in debt. Cost of debt is 8%, that of equity is 12% and the tax rate is 35%. EBIT for the year is $ 20 mn. Is the company profitable?
Interest paid = .08(100) = 8
Net profit = (20 - 8)( .65) = $ 7.8mn.
Expected returns for equity investors = .12(100) = 12
Net operating profit after tax = 20(.65) = 13
Weighted Avg Cost of Capital = .5{ x .65} = .086
Expected returns to capital providers = 200(.086) = 17.2.
So either way, there is a shortfall of $ 4.2 mn.

6. Accounting adjustments
Sales
1000
COGS
625
Operating expenses
240
PBIT
135
Interest 35
PBT
100
Taxes 40
Net Income 60
Restructuring charges 10
Inventory write down 5
Depreciation and Amortization 50
No of shares 30
Restated P&L
Sales
1000
COGS
625
Operating expenses
225
PBIT
150
Interest 35
115
Tax 46
PAT 69
Adjusted net income = 69
Adjusted EPS = 69/30 = 2.3
Adjusted EBIDTA = = 200

7. Accounting adjustments
Year
2015
2016
2017
R&D ($mn) 6 9 15
What adjustment will you make in the P&L and Balance sheet in 2017, assuming R&D exp is written off over 3 years.?
Assuming straight line amortization over 3 years,
R&D for 2015 is fully amortised.
R&D expenditure from is two thirds amortised.
R&D expenditure from 2107 is one third amortised.
R&D expenditure in 2017 P&L = = 10
R&D expenditure capitalized on Balance sheet in 2017 = = 13

8. Accounting adjustments
Current share price = 20
Basic shares outstanding = 100
In the money options = 5
Weighted average exercise price = 18
Calculate no of diluted shares.
Total stock option expense = 90
No of shares repurchased = 90/20 = 4.5
Net increase in no of shares = 5 – 4.5 = 0.5
Total no diluted shares = 100.5

9. Incentives under EVA: Case of Restructuring
A company has invested 100 in a plant. The cost of capital is 12%. Under GAAP, the plant breaks even but under EVA, the loss is 12.Logically, the company should sell the factory for a market value of say 60 and pay this amount as dividend to shareholders. But this would mean a loss of 40 and a hit on the earnings under GAAP. How will the situation change if EVA system is being followed?
Under EVA, the loss of 40 will be reported as a restructuring investment on the balance sheet. Capital would decline by 60.
As a result, capital charge reduces by .12 x 60 = 7.2. EVA increases from -12 to -4.8.
Thus, there is a clear incentive for the mangers to act under EVA. Under GAAP, managers will not be incentivized to sell the plant.

10. A closer look at Amazon
In 2015, Amazon made a net profit of $ 596 mn on a revenue of about $ 100bn.
Net profit margin = .596/100 x 100 = .6%
But investors continue to bet on the company.
It is among the top 5 companies in the world in terms of market capitalization.
Why is this so?

11. Amazon’s value creation machine
Revenue
107006
Direct and indirect costs
104773
Operating profit
2233
Add Depreciation and amortisation
5646
Add R&D
12540
Add Rent
1100
21519
Less Taxes
952
Gross Cash earnings
20567
,Ref: Journal of Applied Corporate Finance, Summer 2016

12. Amazon’s value creation machine (Contd)
Receivables
6423
Payables
20397
Inventory
10243
Unearned revenue
5118
Plant and Equipment
30053
Accrued Expenses
5020
Intangibles
4521
Other LT liabilities
2894
Other LT assets
2611
Capitalised R&D
35853
Capitalised Op Lease
5110
94814
33429

13. Amazon’s value creation machine (Contd)
Gross operating assets = – 33429
Gross cash earnings = 20567
Average gross operating assets for 2015 = 52550
Required return = 8.6%
Capital charge = .086(52550) = 4519
Residual cash earnings = – 4519 = 16048
Net income = 596

14. EVA Illustration (1) NOPAT = 84(.7) = 58.8
Income Statement
Sales
600
COGS
516
PBIT 84
Interest 24
PBT 60
Tax 30%) 18
PAT 42
Assets
Liabilites
Equity
200
Fixed assets
280
Debt
Current assets
120
Total
400
Cost of equity = 18%, Cost of debt = 12%
NOPAT = 84(.7) = 58.8
WACC = .5 [ x0.7] = .132
EVA = PAT – COE ( E) = 42 – (200)(.18) = 6
EVA = NOPAT – WACC ( D + E) = 58.8 – (400)(.132) = 6
EVA = PAT + Int( 1- Tax) = [ x0.7] – (400) .132 = 6

15. EVA Illustration (2) Balance Sheet for Dec 31, 2016 Equity 50
Fixed assets 80
Debt
Current assets 40 CL 20
Total
120
P&L for 2017
Sales 90
COGS 50
Gross profit 40
Operating Exp 16
Interest 4
Tax 7
PAT 13
Cost of equity = 11.4%
Cost of debt = 8%
Tax rate = .35
PBIT = 40 – 16 = 24
NOPAT = (24) (.65) = 15.6
WACC = .5( x .65) = .083
EVA = (100) = 7.3
EVA = x 50 = 7.3
EVA = x x 100 = 7.3

16. EVA vs NPV Year 1 2 3 4 Investment -100 After tax operating cash flows1 2 3 4
Investment
-100
After tax operating cash flows 50
Additional investments
Free cash flow
PV Free Cash 10%
45.5
41.3
37.6
34.2
NPV
58.5
Year 1 2 3 4
After tax operating cash flows 50
Less Depreciation 25
NOPAT
Capital
100 75
Capital 10%
-10
-7.5
-5.0
-2.5
EVA = NOPAT – Cap Charge 15
17.5 20
22.5
PV of EVA
13.6
14.5
15.0
15.4
Total PV
58.5

17. EVA Vs NPV Investment = 100 financed entirely by equity.
Cost of equity is 15%.
Project life is 4 years.
Annual revenue will remain flat at 200.
Direct and indirect costs excluding depreciation will add up to 135.
Depreciation will be 25 per annum.
Tax rate is 50%.

18. 1 2 3 4
Revenues
200
Costs
135
PBDIT 65
Depreciation 25
PBIT 40
Tax 20
NOPAT
CF = NOPAT + Depreciation 45
Capital invested
100 75 50
Capital charge 15
11.25
7.5
3.75
EVA = NOPAT – Cap charge 5
8.75
12.5
16.25
NPV = 45/ /1.15^2 + 45/1.15^3 + 45/1.15^ =
PV of EVA = 5/ /1.15^ /1.15^ /1.15^4 =

19. EVA vs NPV Investment= 200; Equity = 200.
Depreciation is done by straight line method.
Life of the project is 4 years.
The salvage value is 0.
The tax rate is 50%.
The cost of equity is 15%.
Revenues = 400; Direct + indirect costs = 270.

20. Year 1 2 3 4
Revenues
400
Costs
270
PBDIT
130
Depreciation 50
PBIT 80
NOPAT 40
CF = NOPAT + Depreciation 90
Capital
200
150
100
Capital charge 30
22.5 15
7.5
EVA = NOPAT – Cap charge 10
17.5 25
32.5
NPV = / /1.15^2 + 90/1.15^3 + 90/1.15^4 = 56.95
PV(EVA) = 10/ /1.15^2 + 25/1.15^ /1.15^4 = 56.95

21. Strategic cost management
Monthly demand: 8000 units in Months 1-4, 4000 units in Months 5-12
Monthly costs: $ 6000 in Months 1-4 , $ 4000 in Months 5-12
Company decides to invest in a capacity which costs $ 6000 per month through the year. How should the costs be allocated ?
Total costs = 6000 x 12 = 72,000
Total units = x X 8 = 64,000
Cost per unit = /64000 = 1.125
Cost for Months = 6000/8000 = .75; Cost for Months 5-12 = 6000/4000 = 1.5
Cost for months = 32000/32000 = 1
Cost for months 1-4 = (72000 – 8 X 4000)/32000 = 40000/32000 = 1.25

22. Miller Modigliani on Capital StructureB
Total capital
1,000,000
Equity capital
600,000
Debt capital
400,000
Net operating income
100,000
Interest on debt
20,000
Equity earnings
80,000
Cost of equity
10%
12%
Market value of debt
Market value of equity
666,667
Market value of firm
1,066,667
Sell 1 % of shares in B, Cash inflows = 6667, Borrow 4000 at 5%.
Spend 10,667 and buy shares of B.
Operating income = 1067; Interest paid = 200, Net income = 867,
Income forgone = 800

23. Miller Modigliani A B Operating income 100,000 Interest paid 20,000
Debt capitalisation rate 5%
Market value of debt
400,000
Equity earnings
80,000
Equity capitalisation rate 8%
12%
Market value of equity
1,250,000
666,667
Market value of company
1,066,667
Sell 1% equity in Firm A and generate Buy 12500/ = of B.
Debt income = 20,000 x = 234.4
Equity income = 80,000 x = 937.6
Total income earned = 1172
Income forgone = 1000
Gain = 172

24. Miller Modigliani: The impact of taxesB
Operating income
100,000
Interest paid
20,000
PBT
80,000
Tax
40,000
32,000
Equity earnings
60,000
48, 00
Debt earnings
Total earnings
68,000

25. ROI ROE relationship ROE = PAT/E = (PBIT – Int) ( 1 – Tax) / E
= (PBIT – i X D)(1 – Tax) / E (i = interest rate)
= [(ROI) (A) – i X D] / E X ( 1 – Tax)
= [(ROI) (D + E) – i X D] / E X ( 1 – Tax)
= [ ROI + (ROI – i) (D/E)] (1- tax)

26. Problem
For a firm, the cost of debt is 10% and the ROI defined as PBIT/ Total Assets can vary. Tax rate is 30% and debt to equity ratio is 1.5. Find ROE if ROI is a) 15%, b) 20%.
ROE = [ROI + (ROI – r) ( D/E]( 1- t)
A) ROE = [.15 + ( )(1.5)] (.7) = = 15.75%
B) ROE = [.20 + ( )(1.5)] (.7) = = 24.50%

27. Problem
For a company, the cost of debt is 8%, tax rate is 50%, ROI is 14%. The target ROE is 15%. What Debt Equity ratio should it use?
ROE = [ROI + (ROI – r) ( D/E]( 1- t)
.15 = [ ( )(x)](.5)
X = .16/.06 = 2.67

28. Sustainable growth rate
The following information is given about a company :
Sales = 240; Assets = 200
Profit after tax = 45.6; Leverage multiplier = 1.1;
Retention ratio = 0.6
What is the sustainable growth rate?
Sustainable growth rate = ROE X Retention ratio
= (PAT/Sales) X ( Sales/Total Assets) ( Total Assets/Equity)
ROE = (45.6/240)(240/200) (1.1) = .2508
Sustainable growth rate = .6 X = = 15.1%

29. Problem The following data is available about a company:
Price per unit = 1500, Variable cost /unit = 1000
Fixed costs = 10,000,000; Interest = 2,000,000, Sales = 100,000 units
Calculate DOL, DFL and DTL.
DOL = Contribution/PBIT
Contribution = (1500 – 1000) (100,000) = 50,000,000
PBIT = 50,000,000 – 10,000,0000 = 40,000,000
PBT = 40,000,000 – 2,000, = 38,000,000
DOL = 50,000,000/40,000,000 = 1.25
DFL = % change in PBT/ % change in PBIT = PBIT/PBT = 40/38 = 1.053
If PBIT goes up by 10% to 44,000,000, PBT will go up from 38,000,000 to 42,000,000, ie 10.53%
DFL = 10.53/10 = = 40/38
DTL = 1.25 x = 1.32

30. Tax rate = 30%. Dividend = 4 per share Calculate ROI
Sales
4000
Paid up capital (FV = 10)
300
Variable costs
2000
Reserves
1000
Fixed costs
1250
Long Term loan
800
Interest
150
Short Term Loan
400
Fixed Assets
1900
Current Assets
600
Tax rate = 30%. Dividend = 4 per share
Calculate ROI
If target ROE is 40%, what should be the ROI?
If ROE is 30%, what should be the D/E for a target ROE of 40%?

31. ROI = PBIT/Investment = [4000- (2000 + 1250)] /(1900 + 600) = 750/2500 = .3 = 30%
D/E = 1200/1300 = .92
Cost of debt = 150/1200 = .125
If target ROE is 40%,
.40 = {x + (x )(.92)} ( 1-.30)
ROI = = 35.75%
If ROI is 30%, what should be the DOE for a target ROE of 40%?
.4 = {.3 + ( )(x)}(.7) or x = 1.55

32. DOL = 2000/750 = 2.67
Interest coverage = 750/150 = 5
Fixed assets coverage ratio = 1900/800 = 2.37
PAT = 420
Dividends = 30 x 4 = 120
Retention ratio = 300/420
Sustainable growth rate = (420/1300) (300/420) = 23.08%
If g = .12, .12 = 420/1300 (x) or x = retention ratio = .3714

33. Beta estimation Levered beta D/E Tax rate Unlevered beta A 1.24 0.224
0.38
1.24/[ (.62)] = 1.09 B
1.35
0.563
1.35/[ (.62)] = 1.00 C
1.25
0.370
1.25/[ (.62) = 1.02 D
1.45
0.541
1.45/[ (.62)] = 1.09 E
1.14
0.446
1.14/[ (.62)] = 0.89
Suppose the given company’s D/E is and the tax rate remains at 38%, what will be the beta?
Avg beta for peer companies = 1.02
Levered beta for company = [ x .62] (1.02) = 1.29

34. Problem
A firm will make investments and generate operating profits as follows.
Year 1 2 3 4 5
Operating profit 20 40 60 80
100
Net investment 15 10
After the 5th year, the growth rate of free cash flows will be 10%.
Cost of equity is 15 % and cost of debt is 10%.Tax rate is 30%. The company uses 80% equity and 20% debt.
a) Value the firm.
b) By how much will the value increase if the perpetual growth rate increases to 12%?
c) The cost of capital is reduced to 13% by increasing the debt component. What is the implication for value creation if the impact on free cash flows can be ignored?

35. Cost of capital = (0.8)(15) + (.2) (0.10)(.7) = 13.4%
Value of firm for the planning period, ie the first 5 years
= PV of FCF, k= 13.4, = 94.93
Continuing value of the firm = 77/( ) = 2265
Total value = /1.15^5 = 1221
Year 1 2 3 4 5
Operating profit 20 40 60 80
100
OPAT 14 28 42 56 70
Net investment 15 10
FCF
(6) 13 32 51
If growth beyond 5th year increases to 12%,
Continuing value = 84/( ) = 6000

36. Problem
A company generates cash flows of 100 currently. WACC is 15% and the perpetual growth rate is 10%. What will be the impact on value creation if:
A) Cash flows increase by 1% due to cost cuts.
B) Long term growth rate increases by 1%.
C) Repeat the calculations in (b) if due to investments, cash flows fall by 5 in the current year.
Currently, continuing value = 100/( ) = 2000
A) Continuing value = 101/( ) = 2020
B) Continuing value = 100/( ) = 2500
C) Continuing value = 95/( ) = 2375

37. Problem Year 1 2 3 5 6 Revenues 950 1000 1200 1450 1660 1770 PBIDT 195
210
305
330
374
PBIT
140
115
130
222
245
287
Depreciation 55 85 80 83 87
Investment in Fixed Assets
100
250
105
120
Investment in Current Assets 10 15 70 54
The company’s Debt to Equity ratio is 0.4:1 and the pre tax cost of debt is12%. The risk free rate is 8%. The market risk premium is 8% and beta is The tax rate is 35%. Growth beyond year 6 is expected to be 10%. Value the firm.

38. Solution
Year 1 2 3 4 5 6
PBIT
140
115
130
222
245
287
NOPAT 91
74.8
84.5
144.3
159.3
186.6
Depreciation 55 85 80 83 87
Gross CF
146
159.8
164.5
227.3
244.3
273.6
Investment
110
265
155
170
175
174
FCF 36
105.2
9.5
57.3
69.3
99.6
WACC = .4/1.4(.12)(.65) + 1/1.4( x1.06) = ( ) /1.4 = .14
Continuing value = 99.6(1.1)/( ) = 2739
PV of continuing value = 2739/1.14^6 = 1249
PV of cash flows during planning period = 72.4
Firm value = =

39. Problem Invested capital = 50 ROIC = 12%, WACC = 11%, g = 7%
Value the firm
V = FCF/ (WACC – g) = (NOPAT – NI )/ (WACC – g)
NOPAT – NI = NOPAT ( 1 – NI/NOPAT)
= NOPAT [ 1 – (NI/IC) / (NOPAT/IC) ]= NOPAT [ 1 – g /ROIC]
V = NOPAT (1 - g/ROIC)/ (WACC – g)
= [IC x ROIC ( 1 – g/ROIC)] / (WACC –g)
= [ 50 x 0.12 ( /0.12)] /( )
= 62.5

40. Problem Invested capital = 50 Return on invested capital = 12%
Growth rate = 7%
WACC = 11%
Find enterprise value.
V = [IC x ROIC ( 1 – g/ROIC)] / (WACC –g)
V = 50 (.12) ( /.12) / ( )
= 6 (.4167)/(.04) = 62.5

41. Interest coverage and Cash flow coverage ratios.
Following information is available about a company :
PBIT = 240; Tax rate = 50%
Depreciation = 40; Interest rate on debt = 40
Loan payment instalment = 40
Calculate interest coverage and cash flow coverage ratios.
Interest coverage ratio = 240/40 = 6
Cash flow coverage ratio = ( )/[ /.5] = 2.33

42. Problem
The merger of A and B will create NPV of 4 million. A offers one share in exchange for every 2 shares of B. Given the following info, work out the benefits for the shareholders of A and B. A B
Price per share 60 25
No of shares
300,000
200,000
Market value
18,000,000
5,000,000
No of shares of A issued to shareholders of B = 100,000
% of combined entity owned by shareholders of B = 0.25
Value of combined entity = = 27 million
Value for shareholders of B = .25(27) – 5 = 1.75 million
Value for shareholders of A = 4 – 1.75 = 2.25 million

43. Problem
The merger of A and B will create NPV of 50 million. A offers one share in exchange for every 2 shares of B. Given the following info, work out the benefits for the shareholders of A and B. A B
Share price 50 20
No of shares
5 million
2.5 million
Market value
250 million
50 million
Value of combined entity = = 350 million
B’s shareholders get a share of 1.25 /( ) = 20 % of combined entity.
Value to B’s shareholders = .2(350) – 50 = 20 million
Value to A’s shareholders = 50 – 20 = 30 million

44. Problem
A plans to acquire B. Expected synergy in earnings is 10%. Find the exchange ratio acceptable to A and B for protecting their EPS.
EPS of A before merger = 1800/600 = 3
EPS of A after merger = (3000)(1.1)/[ x]
To break even, 3 = 3300/[ x] or x = 1
B will break even if :
3300(500x)/[ x] = 1200 or x = .69 A B
Earnings
1800
1200
No of shares
600
500

45. Problem
P plans to acquire Q. The maximum exchange ratio acceptable to P is .4. What is the expected synergy?
The minimum exchange ratio acceptable to Q is .25. What is the expected synergy?
Pre merger EPS of A = 4500/500 = 9
To break even, 6900(1+x) /[ x.4] = 9 or x = = 7%
For shareholders of B to break even,
6900(1+x) (200) /[ x.25] = 2400 or x = = 22% P Q
Earnings
4500
2400
No of shares
500
800

46. Sinking fund depreciation schedule
A plant costs 1,000,000 and has an economic life of 4 years at the end of which the salvage value is 200,000.If the cost of capital is 14%, what will be the depreciation schedule under the sinking fund method?
PV of salvage value = 200,000/1.14^4 = 118,416
PV of annuity flows = 1,000,000 – 118,416 = 881,584
Dep X PVIFA = , Dep = /2.914 = 302,564
Year 1 2 3 4
Capital
1,000,000
837,436
652,113
440,985
Capital charge
140,000
117,241
91,296
61,725
Depreciation
162,564
185,323
211,268
240,839
Total
302564

47. Sinking fund depreciation schedule
A plant costs 1 million and has a life of 4 years. The salvage value is 200,000. The cost of capital is .14. Prepare the depreciation schedule under the Sinking Fund method.
PV of salvage value = 200,000/1.14^4 = 118,400
PV of annuity = 1,000, ,400 =
PVIFA = 2.914
Annuity amount = 881,600/ = 302, 540.
Year 1 2 3 4
Capital
1,000,000
837,460
652,164
440,927
Depreciation
162,540
185,296
211,237
240,810
Capital charge
140,000
117,244
91,303
61,730
Sum
302,540

48. Economic Depreciation charge
A piece of machinery costs 2 million. The economic life is 10 years and the salvage value is 0. The cost of capital is 15%. What will be the annual economic depreciation charge?
X [1.15^10 – 1] / = 2,000,000
X = 98,504

49. Economic Depreciation charge
A machinery costs Rs 2 million and has an economic life of 10 years at the end of which the salvage value will be nil. The cost of capital is 15%. What is the annual economic depreciation charge?
FVIFA = (1.15^10 – 1)/.15 =
Annual economic depreciation charge = 2,000,000/20.304
= Rs 98504

50. P = D/(k – g) Marakon Model P = Market price B = Book value
= B x r x b/(k – g)
P/B = r x b/(k – g)
But ( 1 – b) (r) = g
or br = r – g
P/B = (r – g) / (k – g)
P = Market price
B = Book value
b = Dividend payout ratio
g = Growth rate

51. Marakon Model Illustration
A company earns an ROE of 25%. The dividend payout ratio is Equity shareholders expect a return of 18%. The book value per share is 50.
A) What should be the market price?
B) If ROE falls to 22%, what should be the payout ratio?
C) If ROE falls to 20%, what should be the payout ratio?
P/B = (r – g) / (k – g); g = .25(1-.4) = .15
A) P = 50 x ( )/( ) = 500/3 =
B) /50 = (.22 – g)/(.18 – g) or g = or b = .1628/.22 = .74
Payout ratio = .26
C) /50 = (.2 – g)/(.18 – g) or g = .172 or b = .172/.2 = .86
Payout ratio = .14

52. Marakon Model Illustration
The growth rate of a company is 10%. The price to Book ratio is 2. The cost of equity is 15%. What should be the return on equity?
P/B = (r – g)/ (k – g) = ( r - .10)/ ( )
Or 2 = ( r -.1)/.05
Or r = .20 = 20%.

53. Cash Flow Return on Investment (CFROI)
CFROI = ( Cash flow – Economic depreciation)/ Cash invested
Suppose initial investment = 2 million
NOPAT = 500,000
Economic life = 10 years; Cost of capital = 15%
Economic depreciation = 98,504
Accounting depreciation = 200,000
CFROI = 500, ,000 – 98,504 = 601,496
CFROI = /2,000,000 = .3 -= 30%

54. Problem
A new plant involves an investment of 300,000. Of this, 250,000 is towards fixed costs and 50,000 for working capital. The project will generate an NOPAT of 21,080 annually over 14 years. Cost of capital is 10% . Replacement cost of the fixed assets will be 250,000.
Calculate CFROI, ROCE and ROGI
Depreciation = 250,000/14 = 17,857
Economic depreciation is calculated as 250,000/PVIFA(k = .1)= 8937

55. Year 1 2 3 4 5 6 12
NOPAT
21080
Depreciation
17857 CF
38937
Economic Depn
8937
Sustainable CF
30000
Book capital
300000
282143
264286
246429
228572
210715
103573
CFROI 10
ROCE
7.03
7.47
7.98
8.55
9.22
20.35
ROGI
12.98

56. Problem
A company is currently generating sales of The sales will not grow but if it makes an investment, sales can grow by 10% for 5 years after which there will be no further growth.
Gross margin = 25%. Discount rate = 16%
Operating expenses = 10%. Tax rate = 40%
Fixed assets = 300. Current assets = 200
Asset turnover will remain constant. Depreciation will equal new investments.
The depreciation rate is 10% of the net fixed assets at the beginning of the year.
What is the value of the new strategy?

57. 1 2 3 4 5 5+
Sales
1000
1100
1210
1331
1464
1611
Gross margin
250
275
303
333
366
403
Operating Exp
100
110
121
133
146
161
PBT
150
165
182
200
220
242
Tax 60 66 73 80 88 97
PAT 90 99
109
120
132
145
Fixed assets
300
330
363
399
439
483
Current assets
266
293
322
Total assets
500
550
605
665
732
805
Equity
Depreciation 30 33 36 40 44 48
Capex 72
Increase in CA 20 22 24 27 29
Operating cash flow 49 54 65
PV ( k =.16) 42 38 34

58. PV of operating cash flows = 190
Residual value = 145/.16 = 906
PV of residual value = 906/1.16^5 = 431
Total value = = 621
Pre strategy value = 90/.16 = 563
Value created = 621 – 563 = 58