Mock 3 — Valuation¶
Take after: Modules 06 and 07. Time: 2.5 hours, closed book (calculator allowed). Marks: 100 — Part A 20, Part B 55, Part C 25. Pass: 70.
Rules: show workings. Amounts in ₹ crore unless stated; shares in crore. Round to one decimal place unless told otherwise. Mark with the answer key.
Part A — multiple choice (20 × 1 mark; ~25 minutes)¶
A1. The value of a business is best defined as: (a) its book value · (b) the present value of the cash it will generate for its owners · (c) its market cap · (d) its replacement cost
A2. In CAPM, the cost of equity rises when: (a) beta falls · (b) the risk-free rate or the equity risk premium rises · (c) the company pays more dividends · (d) the company borrows less
A3. WACC uses the after-tax cost of debt because: (a) debt is riskier than equity · (b) interest is tax-deductible · (c) lenders pay tax · (d) it is conventional only
A4. FCFF (free cash flow to the firm) should be discounted at: (a) the cost of equity · (b) WACC · (c) the risk-free rate · (d) the cost of debt
A5. Enterprise value minus net debt (and other debt-like items) equals: (a) book value · (b) equity value · (c) EBITDA · (d) invested capital
A6. If growth equals zero, NOPAT is ₹100 and WACC is 10%, the value of a no-growth perpetuity is: (a) ₹100 · (b) ₹1,000 · (c) ₹1,100 · (d) infinite
A7. Growth adds value only when: (a) revenue grows faster than GDP · (b) the return on new capital exceeds the cost of capital · (c) margins rise · (d) the company is debt-free
A8. In most DCFs of growing companies, the terminal value is: (a) under 10% of EV · (b) a large share of EV, often 50–80% · (c) always 100% of EV · (d) irrelevant
A9. A reverse DCF: (a) values the company from a target price · (b) solves for the growth or margins the current price implies · (c) discounts cash flows backwards · (d) is the same as a sensitivity table
A10. EV/EBITDA is preferred to P/E when comparing companies that differ in: (a) growth · (b) capital structure (leverage) · (c) size · (d) dividend policy
A11. A company trades at 25× P/E. Its earnings yield is: (a) 25% · (b) 4% · (c) 2.5% · (d) 0.04%
A12. The justified P/B of a lender with RoE equal to its cost of equity is: (a) 0 · (b) 1× · (c) above 1× · (d) cannot be computed
A13. For a bank, the appropriate discount rate is: (a) WACC · (b) the cost of equity · (c) the deposit rate · (d) the repo rate
A14. Normalising a cyclical company's earnings means: (a) using the latest year · (b) using mid-cycle margins or an average over a cycle · (c) using peak earnings · (d) ignoring the cycle
A15. Sum-of-the-parts valuation is most appropriate for: (a) a single-product company · (b) a conglomerate with distinct businesses · (c) a bank · (d) a start-up
A16. Margin of safety is: (a) the gap between price and your estimate of value · (b) the EBITDA margin · (c) the dividend yield · (d) the debt cushion
A17. A probability-weighted valuation of ₹300 with the price at ₹390 implies, other things equal: (a) a buy · (b) the market is more optimistic than your scenarios · (c) the stock is fairly valued · (d) your scenarios are wrong
A18. For a loss-making, high-growth company, a sensible first valuation step is: (a) apply a P/E multiple · (b) model the path to steady-state margins and discount back · (c) use book value · (d) use the dividend yield
A19. Mid-year discounting, compared with end-year discounting: (a) lowers value · (b) raises value slightly · (c) has no effect · (d) applies only to terminal value
A20. A holding company trades at a 50% discount to the market value of its listed stakes. The discount most likely reflects: (a) arithmetic error · (b) taxes on disposal, holding costs, governance and uncertainty about realising the value · (c) the market's ignorance · (d) index weights
Part B — problems (55 marks; ~85 minutes)¶
B1. WACC (8 marks). A company has a beta of 1.10, a target debt-to-capital ratio of 20%, and a pre-tax cost of debt of 9.0%. The risk-free rate is 7.0%, the equity risk premium 6.0% and the tax rate 25%. Compute the cost of equity, after-tax cost of debt and WACC. Then explain in two sentences why raising debt to 50% of capital would not simply lower WACC.
B2. Five-year DCF (15 marks). Forecast FCFF for years 1–5: ₹80, ₹90, ₹100, ₹108 and ₹115 Cr. WACC 12%; terminal growth 5% applied to year-6 FCFF (= year 5 × 1.05); end-year discounting. Net debt ₹200 Cr; 10 Cr shares. (a) Compute the PV of the explicit cash flows, the terminal value, its PV, EV, equity value and value per share. (b) What share of EV is terminal value? (c) Build a 3 × 3 sensitivity table of value per share for WACC 11/12/13% and g 4/5/6%. (d) The stock trades at ₹120: which combinations justify it?
B3. The value-driver terminal value (8 marks). In the terminal year, NOPAT next year is ₹100 Cr, growth 5%, WACC 11%. (a) If the return on new invested capital (RONIC) is 15%, compute the reinvestment rate, the free cash flow and the terminal value. (b) Compute the terminal value if RONIC equals WACC, and the "naive" terminal value that assumes growth without reinvestment (NOPAT ÷ (WACC − g)). (c) Which assumption is the naive formula implicitly making?
B4. Relative valuation (12 marks). Kaveri Pumps (EPS ₹15.08; EBITDA ₹181.9 Cr; net debt ₹140.5 Cr; leases ₹18.2 Cr; 6.07 Cr diluted shares; price ₹390; ROCE 16%) and its four fictional peers:
| Peer | P/E | EV/EBITDA | ROCE | Revenue CAGR FY23–26 |
|---|---|---|---|---|
| Nilgiri Pumps | 39.8× | 24.5× | 24% | 13% |
| Deccan Flow Systems | 36.2× | 20.1× | 14% | 9% |
| Sabarmati Motors & Drives | 33.1× | 21.4× | 21% | 17% |
| Konkan Solar Pumps | 29.6× | 17.8× | 18% | 38% |
(a) Compute the peer median P/E and EV/EBITDA and the implied value per share for Kaveri on each. (b) Give three reasons Kaveri might deserve a discount to the median, using the data. (c) The course's DCF gives ₹320. Reconcile the two answers in three sentences — which would you trust, and why?
B5. Implied expectations (12 marks). A company trades at ₹500 with next year's EPS of ₹25, a payout ratio of 40%, and a cost of equity of 12%. (a) Using the Gordon model on dividends, what perpetual growth rate does the price imply? (b) What return on equity is needed to sustain that growth with a 60% retention ratio? (c) If the company's RoE is 15%, what is the justified P/E (payout = 1 − g/RoE) at g = 8%? What does that suggest about the price?
Part C — valuing a lender: Nirmal Finance (25 marks; ~35 minutes)¶
From the running example: FY26 book value per share ₹154.1; RoE 15.1%; RoA 3.5%; leverage (assets ÷ equity) 4.4×; CRAR 27.6%; price ₹402. Use a cost of equity of 13%.
- (6 marks) Compute the justified P/B at RoE 15.1% and g = 8%, and the implied value per share. Compare with the price.
- (5 marks) Compute the RoE the market price implies at g = 8% (implied RoE = g + P/B × (kₑ − g)).
- (6 marks) Show two routes by which Nirmal's RoE could reach the implied level — through leverage, and through RoA — with the numbers each route requires. Which is more plausible for an "AA−" NBFC with 27.6% CRAR, and what are the risks of each?
- (4 marks) At what RoE would the stock be worth ₹370 (2.4× book) at g = 8%?
- (4 marks) Give your verdict on the stock at ₹402 and one datapoint that would change your mind.
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