Business Valuation solved assignment December 2026
Description
Business Valuation
Q1 A company is evaluating three mutually exclusive projects, each with distinct cash flow patterns and differing levels of risk. The required rate of return is determined using CAPM, where the risk-free rate is 6%, and the market risk premium is 7%. The projects have the following betas and cash flows:
| Year | Project X Cash Flows (Rs.) | Project Y Cash Flows (Rs.) | Project Z Cash Flows (Rs.) |
| 0 | -4,50,000 | -3,50,000 | -3,00,000 |
| 1 | 60,000 | 90,000 | 75,000 |
| 2 | 1,20,000 | 80,000 | 90,000 |
| 3 | 2,10,000 | 1,20,000 | 85,000 |
| 4 | 2,00,000 | 1,40,000 | 80,000 |
| 5 | 1,40,000 | 60,000 | 75,000 |
| Project Betas | 1.2 | 0.8 | 1 |
For each project, (a) calculate the discount rate using CAPM, (b) determine the Net Present Value (NPV), (c) rank the projects in order of feasibility. If the company faces capital rationing and can invest Rs.6,00,000 at maximum, which project or combination should be chosen to maximize NPV without exceeding the investment ceiling?
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Q2 (A) Consider a target company, Alpha Ltd., which operates in an industry highly sensitive to market cycles. The following table contains smoothed historical financial metrics (average over the last 3 years) and the corresponding valuation multiples for its closest comparable:
|
Company |
Average Net Income (Rs. crore) | Average EBITDA
(Rs. crore) |
P/E (Avg.) |
EV/EBITD A (Avg.) |
Beta () |
| P | 510 | 820 | 24 | 12.5 | 1.18 |
| Q | 750 | 1,240 | 21 | 14 | 1.05 |
| R | 630 | 1,190 | 29 | 13.5 | 1.31 |
Alpha Ltd. has a forecasted net income of Rs.675 crore, EBITDA of Rs.1235 crore, and an industry-average beta of 1.18. Given dynamic market conditions, analysts propose to adjust the average P/E and EV/EBITDA multiples for Alpha Ltd. based on its beta: use the average multiple if Alpha’s beta equals peer average, subtract 1.5x from each multiple for every 0.1 beta above the average, or add 1.5x for every 0.1 below. Calculate Alpha’s implied equity value (using both the adjusted P/E and adjusted EV/EBITDA, assuming net debt = Rs.1280 crore), then provide a weighted final equity valuation if EV/EBITDA is assigned 65% weight and P/E 35% weight. Present all steps.
Q2 (B) Delta Foods is preparing its annual financial statements and needs to report the value of its long-held production facility. The finance team debates whether to use book value or current market value for asset valuation, especially given recent sectoral downturns that have depressed real estate prices. Some directors value consistency and regulatory compliance, while others argue that current market value better reflects economic reality for investors. The board must choose an approach that not only meets compliance needs but also maintains credibility with shareholders. Critically analyze the implications of using book value versus market value for asset reporting in financial statements under both regulatory and stakeholder perspectives. Assess which approach would offer a more accurate and responsible representation of Delta Foods’ asset base, considering the market downturn.
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