The current market size of the addressable market is INR 500 crores of Gross merchandise value (@ MRP) of goods sold. And this market is expected to grow at 3% per annum for next 10 years. The current market share of the firm is at 3% of the addressable market, and is expected to grow uniformly to 5% over the next 10 years. Currently, the platform offers 20% discount on the MRP for the products sold. The platform intends to reduce this discount gradually to 15% over a period of next 10 years. Also, the sourcing team of XYZ Limited currently gets a discount of 40% on the MRP from the brands. And it expects this discount to grow to 50% over a period of next 10 years.The average order value is INR 5000, and thelastmilecost per order is INR 120. Average user places 0.1order per month on the platform. Thelastmilecost as % of revenue is expected to decline @ 1% year on year over the period of next 10 years. The rental costs are currently 15% of the GMV @ MRP, and are expected to grow @ 3% per annum. Marketing cost is currently INR 1crores, which is spent on two things: customer retention and customer acquisition. The costof customer retention is INR 0.4per existing user. Assume that all the other fixed expenses (frontmile,midmile, manpower, SG&A, etc.) remain at 15% of the GMV-MRP. Assume the beginning NOL balance to be INR 5 crores, and the corporate tax rate is 25%. Assume that additional working capital is required at 0.75 % of the incremental revenue per year for the next 10 years. Assume the terminal life of the firm to be 10 years. If the freecashflowsare expected to grow at 4% each year after the terminal year till perpetuity. The capital expenditure in the business is needed to be done @ INR 4 crores per annum.

"Comfortable Garments Limited" is not publicly traded in the market. The risk free rate is 4%, and the market risk premium is 8%. There are two comparable firms X and Y in the industry that are publicly traded in the equity market, and their stock price over the 6 years along with the market price is given below, The debt- equity ratios are 15% and 40% for the firms X and Y respectively.The debt on the balance sheet of the firm X is double that of firm Y.

Time stamp

Price per share A(INR)

Price per share B(INR)

Market Index value(INR)

Dec'2015

118

67

27000

Dec'2016

131

88

31000

Dec'2017

142

126

32500

Dec'2018

159

154

36000

Dec'2019

155

145

36500

Dec'2020

179

183

39000

The firm "Comfortable Garments Limited" wants to have a target debt-equity ratio of 40% in the long run. Also, the following are the loans that have been taken by it along with the interest rates.

Loan Number

Amount(Crores INR)

Rate of interest(% Per annum)

1

2000

6.25%

2

4000

5.75%

3

5000

5.5%

1. Computethe revenue and contribution marginsfor the next 10 years.
2. What is the cost spent currently on the customer acquisition?
3. Forecast the EBITDA of the firm for next 10years.
4. Forecast the freecashflowsto the firm over the next 10 years.
5. Find the terminal value of thefirm.
6. Find the cost of equity and cost of debt
7. Find the weighted average cost of capital
8. Find the value of the firm

Question: Mention the reasons for the following.

1. Discountedcashflowapproach is not very useful for valuing the firms into cyclical businesses
2. It is not very easy to value the conglomerate firms that are into multiple businesses.
3. Surplus cash is not accounted for in the value of the firm
4. It is difficult to the valuation of commodity firms or financial sector firms
5. Minority interest is a part of enterprise value
6. P/E ratio is not very relevant for the firms into distress

Answer rating: 100% (QA)

Here are the reasons Discounted cash flow approach is not very useful for valuing firms in cyclical ... View the full answer