Sriram Wheels Case Solution
Q: 4
To calculate the value of the firm. I have calculated the value of the firm for the year of 2014-2019. frost we have calculated free cash flows and discounted those free cash flows through the formula and the company value was 14.22 and the terminal value was 22 and the equity value was 12,72. Calculations can be seen in Exhibit 2
Q: 5 a.
The equity stake was calculated by dividing the equity value by the number of investments done by mathyu which was 2. And the equity stake was 14%.Calculations are in Exhibit 3
Q: 5 b.
In part b to calculate the return on investment we have calculated by multiplying the equity with mathyu investment and the value of equity and debt was 50% both. And the investment was calculated by dividing the additional stake with mathyu investment which was 251% for calculation refer Exhibit 3 part b
Appendix
Exhibit 1.
| Levered Beta (Sriram) | Cost of Equity | |||
| Average Beta value (Comparable Companies) | 0.67 | Levered Beta (Sriram) | 1.1859 | |
| Tax Rate | 30% | Risk free rate | 8% | |
| Debt Equity ratio | 1.1 | Expected return from market | 19% | |
| Levered Beta (Sriram) | 1.19 | Cost of Equity | 21% | |
| Cost of Debt (After Tax) | Loan from Bank | 1.5 | ||
| Interest on Loan | 0.15 | Owners’ Equity | 1.5 | |
| Loan Amount | 1.5 | Debt Ratio | 50% | |
| Cost of Debt (Interest Rate) | 10% | Equity Ratio | 50% | |
| Tax Rate | 30% | |||
| After-tax cost of debt | 7% | |||
| Now we will find WACC through formula | ||||
| Discount Factor | ||||
| Cost of Equity | 21% | |||
| After-tax cost of debt | 7% | |||
| Debt Ratio | 50% | |||
| Equity Ratio | 50% | |||
| Discount Factor (WACC) | 14.02% | |||
(Justifiable)
Exhibit 2
| DCF Valuation | ||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |
| 1 | 2 | 3 | 4 | 5 | 6 | |
| Profit | 0.18 | 0.29 | 0.40 | 0.53 | 0.68 | 0.72 |
| Add: Interest on loan | 0.35 | 0.35 | 0.35 | 0.35 | 0.35 | 0.35 |
| EBIT | 0.53 | 0.64 | 0.75 | 0.88 | 1.03 | 1.07 |
| NOPAT | 0.37 | 0.45 | 0.53 | 0.62 | 0.72 | 0.75 |
| Add: Depreciation (Total) | 0.54 | 0.54 | 0.54 | 0.54 | 0.54 | 0.54 |
| Less: Capex | 0.25 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Change in NWC | -0.25 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Free Cash Flows | 0.91 | 0.99 | 1.07 | 1.16 | 1.26 | 1.29 |
| Discounted FCFs | 0.80 | 0.76 | 0.72 | 0.69 | 0.65 | 0.59 |
| Terminal Value | - | - | - | - | - | 22.00 |
| Discounted Terminal Value | - | - | - | - | - | 10.01 |
| Company Value | 14.22 | |||||
| Less: Debt Value | 1.50 | |||||
| Equity Value | 12.72 | |||||
Exhibit 3
| 5 part a. | 5 part b. | ||||
| Equity Allocation | Return on Investment | ||||
| Equity Value | 14.02 | 50% Stake | 7.010 | ||
| Investment by Mathyu | 2 | Investment by Mathyu | 2 | ||
| Stake in Equity | 14% | Additional Stake | 5.01 | ||
| Return on Investment | 251% | ||||
- Equity Stake (Justifiable).............................
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