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The Canteen is a local franchised restaurant and pub serving quality lunches at reasonable prices

at ten area locations in the tri-city area. The franchise is well-known throughout the region and
has a strong customer base, ranging from professionals on the go to retirees and local college
students. The Canteen's five area locations are organized as individual corporations which are, in
turn, owned and operated by Thor Holdings, LLC, a local company that also owns several other
franchise restaurants, ice cream shoppes, and gourmet coffee houses. Louie Peters, Helga
Stevenson, and Harvey Rogers own Thor Holdings, LLC and are seeking to sell two of the
Canteen locations that are outside their immediate territory. They had started the two locations
about eighteen months ago as part of an expansion plan incentive offered by The Canteen's
parent company. Since then, Thor Holdings declined the rights to additional franchises in those
outlying locations.
The two Canteen locations that Thor Holdings is seeking to sell had revenues of roughly
$750,000 each in the last fiscal year as compared to the other locations that each generated
revenues in excess of $1 million per year. Both locations have had trouble maintaining quality
staff, and the managers have been largely unsuccessful in running the business and controlling
costs. However, the locations are in high traffic strip malls where rent is roughly $10,000 per
month. These two locations experienced net losses for the last fiscal year of roughly $50,000
each.
Mark and Diane Jones both work at one of the Canteen's more profitable locations. Upon hearing
rumors that Thor Holdings is contemplating a sale of the two underperforming locations, they
approach Louie Peters to discuss the possibility of purchasing the franchises. All parties agree
that this would be an ideal situation, given Mark and Diane's background with the Canteen and
their commitment to increasing the franchises' revenues through additional marketing and cost
cutting initiatives. Thor Holdings offers to sell the two franchises for an aggregate price of
$1,000,000. Mark and Diane agree, in principle, on the price. The deal is contingent upon their
ability to secure financing for the acquisition.
Mark and Diane consult Lee Davis, a local business consultant and former head of the state's
Small Business Development Center who has extensive experience in negotiating deals and
working with entrepreneurs to develop a viable business plan. After reviewing the tax return
(which lacks a balance sheet) provided by Thor Holding's accountants, Lee has several concerns
over the viability of the plan. Mark and Diane believe that they will be able to increase sales by
over $200,000 at each of the locations within twelve months. In subsequent years, they anticipate
sales to increase by 8% annually. They expect to accomplish this through increased advertising
initiatives that will have a marginal cost of $10,000. In addition, they estimate that employee
retention and training programs will help to reduce their turnover expenses by roughly $20,000
per location. They also believe that they will be able to reduce their cost of sales from 35% to
30%, saving $50,000 at each location, through better employee training and inventory
management. The other Canteen locations have cost of sales of roughly 32%.

As a way of assessing the acquisition of the Canteen locations and in order to facilitate the
lending process, Lee suggests that Mark and Diane engage a business valuation firm to provide
an estimate of the fair market value of the firm. They agree to this and feel this is an excellent
way of obtaining an impartial opinion on the value of the business relative to the price being
paid.
The valuation analyst receives the tax returns for the Canteen locations. The valuation utilizes an
income approach and a market approach to value these two locations. Within these approaches,
the valuation analyst employs the multi-period discounted earnings method (income approach)
and the direct market data method (market approach). The final value estimate for each of the
Canteen locations is $300,000 for a total value of $600,000 for the two locations. In arriving at
this indication of value, the valuation analyst suggests the following:
Mark and Diane will be able to reduce the cost of sales at each location to 30%, a level that is
below that of the other Canteen locations, particularly given that the cost of sales is now in
excess of the average.
The growth expectations for the two locations are higher than the current and historic growth
rates of the more established Canteen locations. The 8% growth rate is unlikely to be sustained
indefinitely into the future.
The valuation analyst states no opinion as to the likelihood of the marginal increase in
advertising to increase sales by such a disproportionate amount.
After a visit to both locations, the valuation analyst does not believe that the local traffic is
sufficient to support any dramatic increase in sales. Further, the analyst does not believe that the
locations are conducive to the business.
The break-even point for each of the Canteen locations is roughly $1.1 million. The ability of the
firm to reach this level of sales is possible only under highly optimistic projections. In addition,
Mark and Diane would likely be forced to make additional capital contributions to the business
in order to maintain operations until they reach break-even.
Analyse above case and answer following questions:
Qno1. Explain the financial condition of two loss making canteens.
Qno2. Explain the Mark and Diane approach to make the loss making canteens profitable.
Qno3. Is it a wise decision to by a loss making canteen?
Qno4. What is role of Professional Valuer here? What is his opinion?

1. What approaches do you consider in valuing the business?


2. What are the different standards of value? Explain.
3. ?
4. Explain Discounted cash flow' (DCF) and 'discount rates'.
5. What do you mean by Economic Value Added? How is EVA related to valuation?
6. Discuss in detail the various multiples used in relative valuation methods
7. What do you mean by option valuation? When will you use this approach?

8. Difference between
(A) Equity and Enterprise Value (b)Fundamental vs Relative Valuation:
What are the Advantages of Relative Valuation?
What are the disadvantages of Relative Valuation?
When Relative Valuation should be used for valuation:
What are the steps in DCF valuation
What is value enhancement? Explain CFROI and EVA.

It is common to compare firms on their price to earnings ratios. What are the merits and demerits
of using this measure?
What is brand value? What are the specific methods of brand valuation?

Northern Transport Ltd. is presently using a Truck that has a book value of Rs. 6.50 lakhs. It is
depreciated on straight line basis and will be fully written off over next six years. Presently the salvage
value of the Truck is Rs. 3 lakhs and after six years it is expected to fetch a salvage value of Rs. 50,000.
The company is planning to replace the old Truck with a new one, which will cost Rs. 14 lakhs. It will be
depreciated on straight line basis over the next six years and will be fully written off at the end of six
years. At the end of six years the salvage value of the new Truck is expected to be Rs. 3.50 lakhs. The
following additional information are provided:
(i)

Purchase of new Truck will result in savings in annual operating and maintenance costs by Rs.
1.50 lakhs.

(ii) There will be increase in annual income by Rs. 2.50 lakhs.


(iii
The cost of capital of the company is 12% and applicable tax rate is 30%.
)
You are required to calculate yearly Cash Flows for years 1st to 5th and for 6th year.

9. The following information relates to the sources of long term finance used by a company:

Sources

Book
value

Market
value

(Rs.
lakhs)

(Rs.
lakhs)

Paid up Equity Capital


200
400
Reserves and Surplus
400

Preference Shares 12%


150
159
Debentures 8%
250
241
The cost of Equity capital is 19% and tax rate is 40%.
Calculate approximate weighted cost of capital using (i) book value weights and (ii) market
value weights.
11. From the last 5 years annual reports of Queen India Limited, the following information
about dividend declared has been collected:

200405
200506
200607
200708
200809

The average dividend yield in the industry is estimated to be 8%. If the nominal value of
the Companys share is Rs.10, then determine the value per share of Queen India Limited
using the Dividend Yield Method. (Use Weighted Average Method for determining the
average dividend rate of the company.
12 Perfect Precision Limited has adopted a strategy of inorganic growth and as a
consequence, it is always on the look out for a soft target to be acquired. Recently, the
company has identified Exact Precision Limited as a target company and the concerned
team is working on this acquisition. Some of the financial data collected by the team is
given below:
Perfect Precision Limited
Exact Precision Limited
Earnings per Share (EPS)
Rs. 7.50
Rs. 5.00
Market Price per Share (MPS)
Rs. 80.00
Rs. 35.00
Number of Shares (in crores)
100
25

It is expected that there may be a synergy gain 5%. Assume that you are one of the
members of the concerned team and are requested to determine the exchange ratio if
Perfect Precision Limited have postmerger earnings per share of Rs.6.
13 MILTON LTD. is foreseeing a growth rate of 10% per annum in the next 2 years. The
growth rate is likely to 12% for the third and fourth year. After that the growth rate is
expected to stabilize at 8% per annum. Given that, the present value of dividend stream
for first 2 years is Rs. 3.03 and for next 2 years is Rs. 3.08. If the last dividend paid was
Rs. 1.50 per share and the investors required rate of return is 10%, calculate the
intrinsic value per share of Milton Ltd.
14 M Ltd. agrees to acquire N Ltd. based on the capitalization of last three years profits of N
Ltd. at an earnings yield of 25%.
For the years.
Profits of N Ltd Rs. lakhs
2007
2008
2009

75
89
82

Calculate the value of business based on earnings yield basis.

15 X Ltd. is considering the proposal to acquire Y Ltd. and their nancial information is given
below:
Particulars
X Ltd.
Y Ltd.
No. of Equity shares
10,00,000 6,00,000
Market price per share
(Rs.)
30
18
Market Capitalisation
3,00,00,00 1,08,00,00
(Rs.)
0
0
X Ltd. intend to pay Rs. 1,40,00,000 in cash for Y Ltd., if Y Ltd.s market price reects only its
value as
a separate entity. Calculate the cost of merger : (i) When merger is nanced by cash (ii) When
merger is nanced by stock.
15 Z Ltd. has an issued and paid-up capital of 50,000 shares of Rs. 100 each. The company
declared a dividend of Rs. 12.50 lakhs during the last ve years and expects to maintain
the same level of dividends in the future. The control and ownership of the company is
lying in the few hands of Directors and their family members. The average dividend yield
for listed companies in the same line of business is 18%.

CK ltd paid a dividend of 2.12 in 2006. The dividends are expected to grow at 5% per year in the long
term and the company has a cost of equity of 9.40%. what is the value per equity share.
A firm has cash flows of 850 million in the current year after reinvestment but before debt payment. These cash flows are expected to grow at 15% for the next five years and at 5% thereafter.
The cost of capital is 9.17% and the value of debt today is 20000 million.

NCHCorporation,whichmarketscleaningchemicals,insecticidesandotherproducts,paid
dividendsof$2.00persharein1993onearningsof$4.00pershare.Thebookvalueofequity
persharewas$40.00,andearningsareexpectedtogrow6%ayearinthelongterm.Thestock
hasabetaof0.85,andsellsfor$60pershare.(Thetreasurybondrateis7%.)
A.Basedupontheseinputs,estimatetheprice/bookvalueratioforNCH.
Answertrueorfalsetothefollowingstatements,withashortexplanation.(Anythree)
A.Astockthatsellsforlessthanbookvalueisundervalued.
B.Ifacompany'sreturnonequitydrops,itsprice/bookvalueratiowillgenerallydrop
morethanproportionately,i.e.,ifthereturnonequitydropsbyhalf,theprice/bookvalue
ratiowilldropbymorethanhalf.
C.Acombinationofalowprice/bookvalueratioandahighexpectedreturnonequity
suggeststhatastockisundervalued.
D.Otherthingsremainingequal,ahighergrowthstockwillhaveahigherprice/book
valueratiothanalowergrowthstock.
E.IntheGordonGrowthmodel,firmswithhigherdividendpayoutratioswillhave
higherprice/bookvalueratios.
.

Find the amount of payment to be made into a sinking fund to accumulate $75,000
for 4 and half year: money earns 6% compounded semiannually