Fifteen years ago, Manish Kothari set up a company called Manish Detergents to make detergent powder....

  

Transcribed Image Text:

Fifteen years ago, Manish Kothari set up a company called Manish Detergents to make detergent powder. After few years of teething problems, the company established itself as a low-cost producer of good quality detergent powder branded as Manna. For the last decade, Manish detergents has grown profitably. The profit and loss account for year 0 (the year that just ended) and the balance sheet at the end of year 0 for Manish Detergents are given below: Revenues EBITDA Depreciation EBIT Profit and Loss Account Interest EBT Tax EAT Financials of Manish Detergent 900 millions 45 Loans 209 Shareholders' Funds 164 Total 24 Balance Sheet Capital & Liabilities 91 Total 140 Net Fixed Assets 49 Net Current Assets Assets 500 200 450 250 700 The paid up capital of Manish Detergents is 100 million divided into 10 million shares of 10 each. All the shares are presently held by Manish Kothari, who is planning to take the company public by selling 4 million of his existing shares. The purpose of the issue is to enable Manish Kothari to liquefy a portion of his equity. Once the equity of Manish Detergents is listed it will help the company in raising capital from the market as and when required in the future. Manish Kothari called Ajay Kapoor, vice president of Indus Capital, a merchant banking firm, to help him in estimating the worth of his shares. Ajay Kapoor asked Manish Kothari to spell out his plans for the next 5 to 10 years, develop the forecast for financial performance and investment requirements, and indicate his target debt- equity ratio. Manish Detergents is currently operating mainly in western India but it has definite plans to set up a unit in Hyderabad in the next two years to serve the southern market. This will require substantial investment in factory, godowns, and current assets. Since this investment will take some time to start yielding results, Manish expects a short-term dip in profits. However, once the southern venture takes off Manish is confident that profits will improve. Taking into account the above, Manish Kothari has developed forecasts of operating profit and investment requirements which are given in Exhibit 1. Beyond year 6 he expects that Manish Detergents will grow at a steady state of 10 percent and this will apply to its free cash flow as well. Exhibit 1 Financial Forecasts Revenues PBDIT Depreciation PBIT • Pre-tax cost of debt Part A: Forecasted Operating Profit 2 1000 200 85 115 Gross investments in fixed assets Investments in net current assets Total for Manish Detergents 1 950 195 55 140 • Cost of equity Required: 3 1200 210 80 130 Part B: Forecasted Investments 1 2 3 4 100 250 85 100 10 15 70 70 110 265 155 170 4 1450 305 83 222 35 percent 12 percent 5 1660 330 85 245 Manish Kothari is happy with the present debt-equity ratio of 0.4:1.0 and plans to keep it that way. Ajay Kapoor has come up with the following estimates: • Tax rate 16.48 percent 6 1770 374 87 287 5 6 105 120 70 54 175 174 2.39 1. Calculate the DCF value of the firm 2. Calculate the value of the equity, assuming that the market value of debt is the same as its book value. Fifteen years ago, Manish Kothari set up a company called Manish Detergents to make detergent powder. After few years of teething problems, the company established itself as a low-cost producer of good quality detergent powder branded as Manna. For the last decade, Manish detergents has grown profitably. The profit and loss account for year 0 (the year that just ended) and the balance sheet at the end of year 0 for Manish Detergents are given below: Revenues EBITDA Depreciation EBIT Profit and Loss Account Interest EBT Tax EAT Financials of Manish Detergent 900 millions 45 Loans 209 Shareholders' Funds 164 Total 24 Balance Sheet Capital & Liabilities 91 Total 140 Net Fixed Assets 49 Net Current Assets Assets 500 200 450 250 700 The paid up capital of Manish Detergents is 100 million divided into 10 million shares of 10 each. All the shares are presently held by Manish Kothari, who is planning to take the company public by selling 4 million of his existing shares. The purpose of the issue is to enable Manish Kothari to liquefy a portion of his equity. Once the equity of Manish Detergents is listed it will help the company in raising capital from the market as and when required in the future. Manish Kothari called Ajay Kapoor, vice president of Indus Capital, a merchant banking firm, to help him in estimating the worth of his shares. Ajay Kapoor asked Manish Kothari to spell out his plans for the next 5 to 10 years, develop the forecast for financial performance and investment requirements, and indicate his target debt- equity ratio. Manish Detergents is currently operating mainly in western India but it has definite plans to set up a unit in Hyderabad in the next two years to serve the southern market. This will require substantial investment in factory, godowns, and current assets. Since this investment will take some time to start yielding results, Manish expects a short-term dip in profits. However, once the southern venture takes off Manish is confident that profits will improve. Taking into account the above, Manish Kothari has developed forecasts of operating profit and investment requirements which are given in Exhibit 1. Beyond year 6 he expects that Manish Detergents will grow at a steady state of 10 percent and this will apply to its free cash flow as well. Exhibit 1 Financial Forecasts Revenues PBDIT Depreciation PBIT • Pre-tax cost of debt Part A: Forecasted Operating Profit 2 1000 200 85 115 Gross investments in fixed assets Investments in net current assets Total for Manish Detergents 1 950 195 55 140 • Cost of equity Required: 3 1200 210 80 130 Part B: Forecasted Investments 1 2 3 4 100 250 85 100 10 15 70 70 110 265 155 170 4 1450 305 83 222 35 percent 12 percent 5 1660 330 85 245 Manish Kothari is happy with the present debt-equity ratio of 0.4:1.0 and plans to keep it that way. Ajay Kapoor has come up with the following estimates: • Tax rate 16.48 percent 6 1770 374 87 287 5 6 105 120 70 54 175 174 2.39 1. Calculate the DCF value of the firm 2. Calculate the value of the equity, assuming that the market value of debt is the same as its book value.

Answer rating: 100% (QA)

Here are the stepbystep calculations to value Manish Detergents using DCF valuation 1 Calculate Free ... View the full answer