nova chemicals wanted to acquire its major competitor through its due diligence department it has found out

the target fir

10 crores provided equaly buy 10 % debt and 5 lakh equity shares of 100 each.
its cost of equity is 14% and subject to corporate tax rate of 40 %. The projected free cash flows to all investors of the targe

years amt. in laksh

1 300
2 200
3 500
4 150
5 600

nova is planning to evaluate the firm in 2 diffwrent ways - the overall value of the firm and valuation from the presepective
10% debt is repayable at the end of 5th year with int. for the year.

SOLUTION
Computation of overall cost of capital
source after tax cost weights total cost
equity 14 0.5 7
debt 6 0.5 3
WACC 10

Valuation of firm on WACC (1/1+.1)N Valuation of the firm o

year FCFF PV factor Total Year FCFF
10%
1 300 0.909 272.7 1 300
2 200 0.826 165.2 2 200
3 500 0.751 375.5 3 500
4 150 0.683 102.45 4 150
5 600 0.621 372.6 5 600

Total 1288.45
less: debt 500
Balance 788.45
t has found out the target firm has employed

s to all investors of the target firm for 5 years are given below

ation from the presepective of equity shareholders assume

ke is cost of equity
Valuation of the firm on ke (cost of equity)
Int. after tax fcff to equity PV factor total PV
14%
30 270 0.877 236.842
30 170 0.769 130.809
30 470 0.675 317.237
30 120 0.592 71.050
530 70 0.519 36.356
Total 792.294