Application of the valuation model on ABC ltd.

The following example relates to the valuation of ABC ltd. under the assumption of temporal super
normal growth followed by a period of no growth. The formula used is given below:
n

(1+gs)t

X0(1-T) (1+gs)n+1

V0 = X0 (1-T) (1-bs) ------------- +

t =1

--------------------------

(1+k)t

k (1+k)n

Where,
V0 = Total firm value value of equity (S) plus Debt (B)
X0 = EBIT or NOI
T = Tax rate
b = Investment rate
r

= Profit rate

g = Growth rate
k = Cost of capital
N = Growth period
The various key parameters in terms of data and projections are given under two scenarios:

Optimistic scenario

Here, growth rate in EBIT is 15% per year, investment rate (b) is 50%, tax rate (T) is 34%, profit rate
(r) is 30%, growth period (N) is 10 years, and cost of capital (k) is 10%.
The calculation of valuation is as follows:
10 (1+ 0.15) 946 (1-0.34) 1.15
V0 = 946 * (1- 0.34) (1- 0.5)

------------ + --------------- (--------) (1.15)

t= 1 (1+0.10)

0.10

1.10

V0 = Rs. 4,019 + Rs. 11,199 = Rs.15,218

Pessimistic scenario

Under pessimistic scenario, the growth rate g in earnings (EBIT) is reduced to 13% per year, Profit
rate r = 26% , cost of capital k = 11% and other assumptions are same.
The calculation of valuation is as follows:

10 (1+ 0.13) 946 (1-0.34) 1.13

V0 = 946 * (1- 0.34) (1- 0.5)

------------ + --------------- (--------) (1.13)

t = 1 (1+0.11)

0.11

1.11

V0 = Rs. 3,449 + Rs. 7,668 = Rs.11,116

Valuation items
First term EBIT
Second term EBIT
Value of firm
Less: Total debt
Value of equity
Number of shares
Value per share

Optimistic method
Rs. 4,020 Crores
Rs.11,200 Crores
Rs.15,220 Crores
Rs. 630 Crores
Rs. 14,590 Crores
150 Crores
Rs. 97.27

Pessimistic method
Rs. 3,500 Crores
Rs. 7,800 Crores
Rs.11,300 Crores
Rs. 630 Crores
Rs. 10,670 Crores
150 Crores
Rs. 71.13