Corporate finance

Resit TMA 2

TMA 2

TMA 02

TMA 02 contributes 25 per cent to the total marks available for continuous assessment on BB831. The overall word limit is 2500 words. No specific word limits will be applied to the individual questions in this TMA. However, when you are allocating your word count, you should take account of the marks available for each question. Answer all questions.

Question 1 (20 marks)

Discuss in detail the following aspects of investment appraisal:

a.    Investment appraisal projects use cash flows rather than profit. Explain the above highlighting the difference between cash flows and profit. (5 marks)

b.    While performing investment appraisal, managers need to consider only relevant cash flows. Explain this statement highlighting which cash flows are ‘relevant’ and which are ‘irrelevant’. (5 marks)

c.    Investment appraisal forecasts need to keep in mind ‘inflation’ in the economy. Why is it so? (5 marks)

d.    While facing with a ‘make or buy’ decision while doing investment appraisal, what techniques would you suggest a manager to use in figuring out whether in-house manufacturing (making) is better or outsourcing the production to a third-party and buying from there is better? (5 marks)

 

Question 2 (40 marks)

TATASTEEL Ltd is a listed company on the National Stock Exchange, India (NSE Ticker: TATASTEEL). Refer to the attached excel for a snippet of the Balance Sheet and Income Statement of TATASTEEL for FY2017-2019.

Being the finance manager, you are required to prepare a cash flow forecast for TATASTEEL using the Discounted Cash Flow (DCF) approach and come up with a meaningful estimate of its share price.

In addition to the financial statement data, the following is the relevant information is also available about the business:

·         Forecast period: 5 years

·         Revenue growth from next year onwards: 10%

·         Expenses/Sales ratios for forecast period to be same as average expense/sales ratio for last three years

·         Tax rate to be computed as %EBT of last year and is to be continued for forecast period

·         Forecast change in working capital to be same as difference of working capital for last two years

·         Forecast depreciation to be same as last year’s depreciation

·         No additional capital expenditure to be made during the forecast period

·         Weights of debt and equity to remain same as those of last year

·         Beta of the stock to be computed using the share price and Nifty index data for last three years also provided in the excel document. Necessary adjustments to be made in the beta computation.

·         Risk-free rate, Rf: 6%, Market Return, Rm: 8%

·         No of Shares outstanding: 1,126,490,211

·         Terminal growth rate: 4%

Compute the following (5 marks each):

      i.        Beta of the TATASTEEL stock

     ii.        Weighted average cost of capital of the company

    iii.        Terminal value of the projection period

   iv.        Enterprise value of the firm

    v.        Implied share price as per your calculations

 

Question 3 (40 marks)

Part a. Using the Reliance Industries Ltd (NSE Ticker: RELIANCE) 2019 annual report and financial statements, define economic value and explain how an adjusted book value approach to valuing assets and liabilities moves book value nearer to economic value.

You are required to provide a written response which highlights four specific elements in Reliance’s balance sheet that might need to be adjusted to arrive at an economic value.

For each element, explain the type of adjustment and the type of information that might be required before an adjustment could be made to arrive at an economic value for Reliance at its 2019 financial year end. (10 marks)

b. Calculate the following market multiple ratios for Reliance Ltd. at its 2019 financial year-end:

• i. EV/EBITDA (5 marks)
• ii. Price-to-earnings ratio (PE ratio) (5 marks)
• iii. Price-to-cash-flow ratio (5 marks)
• iv. Price-to-book ratio (5 marks)
• v. Contrast and explain the results of the different market multiple ratios that you calculated. Evaluate the usefulness of market multiple ratios in company valuation. (10 marks)

Keep in mind the MBA guidelines for good academic practice as well as referencing and plagiarism.