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Contents
PART A..
Question a) WACC..
Question b) i: Cost of Debt (Kd):
Question b) ii: Cost of Equity (Ke):
Question b) iii: Capital Structure.
Question b) iv: WACC..
Question b) v: Comments on health of business.
Part B: Q2.
Question 1: Price to Book value.
Question 2: Price to Equity value.
Question 3: EV/ EBITDA..
Question 4: EV/ Sales.
Question 5: Market Multiples.
Question 6: Negative PE ratio.
Question 7: Significance of EV/EBITDA..
Part B: Q3.
Question 1: Operating Cash Flow..
Question 2: Terminal Cash Flow..
Question 3: Enterprise Value.
Question 4: Interpretation of Enterprise Value.
Part B: Q4.
Question 1 to 3: Price of the bond @ YTM 6%, 7% and 6.5%..
Question 4: Price of the bond, one year left for maturity.
Question 5: price of the bond right before the final coupon payment
Question 6: price of the bond after the final coupon payment
Question 7: price yield curve.
Reference.
PART A
Companies raise funds from various sources to do their respective businesses which, mainly comprises of two major components including equity and debt. Both equity holders and lenders expect a definite return against the funds (money) or capital they have provided. This return that is expected by the financers is the cost (of capital) to the company (or business) which is required to be returned to debt holders and to shareholders. WACC basically is the average return that both of these financers are expecting from the company. It represents represent the opportunity cost of the risk that the investors (including both equity and debt) takes by putting their money into a business (El Ghoul et al. 2018).
Hurdle rate is basically the minimum acceptable rate of return (MARR) on an investment or on a project as required by the investors. It helps businesses in making crucial decisions about whether to pursue a specific project or not. Now WACC is generally used as the hurdle rate while project appraisal because for the company, it is the minimum return that company must earn so as to return back to the investors.
= > Kd = 6.5 %
Ke as per CAPM is given by
Where:
Rf = risk free rate of return
β = Beta
Rm – Rf = Risk premium
Given:
Rf = 6%
β = 0.91
Risk premium = 4%
Therefore,
=> Ke = 9.64 %
Capital Structure 
Amounts 
Total Equity 
98359 
Total Debt 
83790 
Total Capital 
182149 
Capital elements 
Weights 
% of equity 
54% 
% of debt 
46% 
Costs of capital:
Ke = 9.64%
Kd = 6.5%
Weights:
We = 54%
Wd = 46%
Tax rate = 25%
=>
=> WACC = 7.5 %
The cost of debt (or Kd) is the fixed cost that the business has to pay back to the lender in addition to the principal amount. Kd (as calculated) of Bharti Airtel Ltd. is 6.5% whereas the risk free rate is 6.0%, the difference is just of 50 basis points. In other words the company has a very lower cost of debt. That means lower fixed cost obligations and fewer burdens on liquid asset pools (Frank and Shen 2016).
The cost of equity (or Ke) is the required rate of return that the equity investors expect against purchasing shareholding in the company. The Ke of Bharti Airtel Ltd is 9.64 % with a beta (measure of systematic risk) of 0.91 (close to 1), that means the stock of Bharti Airtel is expect to be same as volatile as the market and will be able to generate similar returns as that of market. The Ke of 9.64% with a beta of 0.91 can be considered to be steadier rather than volatile
Cost of capital (or WACC) represents a hurdle rate (or MARR) that a company must overcome before starting to start generating some value. The WACC of Bharti Airtel is 7.5% which is due to lower Kd with approx half of financing from debt. The company also has a lower WACC than the average industry WACC of 10%. This indicates that company will start generating value very early after overcoming the hurdle rate (El Ghoul et al. 2018).
Part B: Q2
Given:
Share price on 29 Mar‘19 (per share) 
305.6 
No. of shares outstanding 
545.325 
Total Noncurrent assets 
202165 
Total Current assets 
20520 
Total Assets 
222685 
Total Noncurrent liabilities 
63863 
Total Current liabilities 
60463 
Total Liabilities 
124326 
(Dergiades, Milas and Panagiotidis 2020)
Book value = Total assets – Total liabilities
=> Book value = 98359
Book Value per share = Book value/ No. of shares outstanding
=> Book Value per share (BVPS) = 180.37
PB ratio = Market price / BVPS
=> PB ratio = 1.7
Profit/Loss for the Period (Net income) = 1829
EPS = Net income/ No. of shares outstanding
=> 1829/545.325
=> EPS = 3.35
PE ratio = Market price per share/ EPS
=> 305.6/ 3.35
=>PE ratio = 91.1
EBITDA: 

Total Revenue 
49858.7 
Less: 

Purchase Of StockIn Trade 
0 
Operating And Direct Expenses 
29245.1 
Employee Benefit Expenses 
1471 
EBITDA 
19142.6 
EV 

Market Cap 
166651 
Add: Total Debt 
83790 
Less Cash and cash equivalents 
219 
EV 
250222 
(Dergiades, Milas and Panagiotidis 2020)
=> EV/EBITDA = 13.07
=> EV/Sales = 5.02
Market multiples are financial measurement tools that helps in quantifying the values of a company. However, these types of valuation metrics are generally not used in isolation but while comparing a company with another. E.g. the PE ratio of SBI of 9.81 (Yahoo Finance) alone provides very less material information about the valuation of the company, but when it is compared with the PE ratio of HDFC Bank of 17.75, it can be said that to claim a single rupee of earnings stock of SBI is cheaper than HDFC.
Accounting ratios determines the financial health and periodical performance of the company while valuation ratios provide value to the company on the basis of such health and performance. Valuation ratios include and uses market related for various ratio calculations data (Dergiades, Milas and Panagiotidis 2020).
The PE ratio determines the value that investors are willing to pay per share on the basis of its past periodical (annual) earnings. However, a negative PE ratio for a stock is possible and indicates that EPS, or earnings of the company remain negative in other words the company reported a net loss.
The PE ratio in terms that investors are willing to receive money against purchasing Bharti Airtel’s shares will not be an accurate interpretation, but still PE ratio can determine various material information if comparative analysis is done. The PE ratio of current year can be compared with previous year’s ratio, if the company is continuously showing negative PE values, and then there are possibilities of bankruptcy. In telecom and tech companies, it is not uncommon that companies shows negative PEs, therefore, it is required to compare PE of Bharti Airtel with other telecom players (Dergiades, Milas and Panagiotidis 2020).
EV/EBITDA compares Enterprise Value (EV) of a company with its Earnings before Interest, Tax, and Depreciation & Amortization (EBITDA). The ratio is typically used as a valuation tool to “compare the relative values” of businesses. It determines the amount in EBBITDA times that investors needs to pay to acquire the overall business. A low EV/ EBITDA value is generally preferred.
This is a popular relative valuation tool and in order to value a business, the ratio of the company is compare with the industry average. E.g. the EV/ EBITDA measure of Bharti Airtel (as calculated) was 13, now if the industry average is less than 13, then the stock is over values and vice versa. The metric is also used in calculating the terminal value in a Discounted Cash Flow DCF model (Dergiades, Milas and Panagiotidis 2020).
Part B: Q3
2019 
2020 
2021 
2022 
2023 
2024 

Revenue 
50,000,000 
55,000,000 
60,500,000 
66,550,000 
73,205,000 
80,525,500 
Expenses 
25,000,000 
27,500,000 
30,250,000 
33,275,000 
36,602,500 
40,262,750 
EBITDA 
25,000,000 
27,500,000 
30,250,000 
33,275,000 
36,602,500 
40,262,750 
Depreciation 
20,000,000 
15,000,000 
11,250,000 
8,437,500 
6,328,125 
4,746,094 
EBIT 
5,000,000 
12,500,000 
19,000,000 
24,837,500 
30,274,375 
35,516,656 
Tax expenses 
1,500,000 
3,750,000 
5,700,000 
7,451,250 
9,082,313 
10,654,997 
NOPAT 
3,500,000 
8,750,000 
13,300,000 
17,386,250 
21,192,063 
24,861,659 
Add: Depreciation 
20,000,000 
15,000,000 
11,250,000 
8,437,500 
6,328,125 
4,746,094 
Less: Increase in WC 
10,000,000 
10,000,000 
10,000,000 
10,000,000 
10,000,000 
10,000,000 
Operating Cash Flow 
13,500,000 
13,750,000 
14,550,000 
15,823,750 
17,520,188 
19,607,753 
(Miles and Van Clieaf 2017)
Terminal Value = Rs. 168,299,881
2019 
2020 
2021 
2022 
2023 
2024 
PERPETUITY 

WACC 
15.00% 

YEARS 
1 
2 
3 
4 
5 

Discount Factor 
0.870 
0.756 
0.658 
0.572 
0.497 

OCF (PV) 
11,956,522 
11,001,890 
10,404,372 
10,017,224 
9,748,519 
83,674,785 
PV for 15 year 
53,128,527 
sum of PV 
PV for terminal value 
83,674,785 
perpetuity growth 
Total PV 
136,803,313 
(sum of PV) + (perpetuity growth 
net debt level 
 

Enterprise Value 
136,803,313 
total PV  net debt level 
2019 
2020 
2021 
2022 
2023 
2024 
PERPETUITY 

WACC 
15.00% 

YEARS 
1 
2 
3 
4 
5 

Discount Factor 
0.870 
0.756 
0.658 
0.572 
0.497 

OCF (PV) 
11,956,522 
11,001,890 
10,404,372 
10,017,224 
9,748,519 
83,674,785 
Enterprise value (or EV) determines the total value of a company, which is often considered to be a more comprehensive or allinclusive substitute of equity market capitalization (Market Cap). EV includes the market capitalization of a company in its calculation along with company’s longterm debt and shortterm as well as the cash pools on the balance sheet (Behr, Mielcarz and Osiichuk 2018).
The EV computed above basically represents the economic value of the company which comes out to be Rs. 136,803,313(or approx. 137 million). During a potential takeover, the enterprise value can be considered to be the minimum amount that acquirer company have to pay to the host company (the company for which EV is calculated). If this is a public listed company, the price per share of the stocks of the company can be calculated by dividing the EV by outstanding number of shares. Thus the financial manager can identify, whether the stock is overvalued or undervalued (or rightly valued).
Part B: Q4
Calculation of bond price using excel function of present Value (= PV)
Function = PV (YTM, N, PMT, FV)
Where:
Given
Government Bonds 

10year Government of India bond (GSec) 

Face Value 
1000 

Semiannual Coupon Rate 
6.50% 

Period left till maturity 
7 
Q1 
Q2 
Q3 

YTM 
6% 
7% 
6.50% 
N 
14 
14 
14 
PMT 
32.5 
32.5 
32.5 
FV 
1000 
1000 
1000 
PV 
$1,028.24 
$972.70 
$1,000.00 
(Thomas, Madhanagopal and Ghosh 2017)
Government Bonds 

10year Government of India bond (GSec) 

Face Value 
1000 

Semiannual Coupon Rate 
6.50% 

Period left till maturity 
1 
YTM 
6% 
7% 
6.50% 
N 
2 
2 
2 
PMT 
32.5 
32.5 
32.5 
FV 
1000 
1000 
1000 
PV 
$1,004.78 
$995.25 
$1,000.00 
The Price right before the final coupon payment will be the price (clean price) before 6 months including the accrued interest for the 6 months. That means when one wants to sell the bond right before the coupon payment will get the bond price at that date and the 6 months accrued interest which is basically called the dirty price (Dong, Korobenko and Deniz Sezer 2020).
The clean price of the bonds before 6 months is:
YTM 
6% 
7% 
6.50% 
N 
1 
1 
1 
PMT 
32.5 
32.5 
32.5 
FV 
1000 
1000 
1000 
PV 
$1,002.43 
$997.58 
$1,000.00 
The accrued interest for the 6 months period is 32.5 for each bond and the dirty price is given by:
Dirty price = Clean price + accrued interest
Therefore, the required (dirty) price is as follows:
The price of the bond as the final coupon payment is being paid is the clean price when the period remaining for the maturity is 6 months. The clean price is given as follows:
YTM 
6% 
7% 
6.50% 
N 
1 
1 
1 
PMT 
32.5 
32.5 
32.5 
FV 
1000 
1000 
1000 
PV 
$1,002.43 
$997.58 
$1,000.00 
(Dong, Korobenko and Deniz Sezer 2020)
(Thomas, Madhanagopal and Ghosh 2017)
It can be clearly observed from the above graph that the price is inversely related to the yield of the bond (or YTM). As yield is increasing from 6% to 7%, the price of the bond is continuously decreasing. The priceyield curve relates the price of a coupon bond to its annual yield.
The price at 6% YTM was $1028, when the YTM increases to 6.5%, the price decreased to $1000. The price gets further decreased to $973 when the YTM increases to 7%.
Reference
Behr, A., Mielcarz, P. and Osiichuk, D., 2018. Terminal value calculation in dcf valuation models: An empirical verification. eFinanse: Financial Internet Quarterly, 14(1), pp.2738.
Dergiades, T., Milas, C. and Panagiotidis, T., 2020. A mixed frequency approach for stock returns and valuation ratios. Economics Letters, 187, p.108861.
Dergiades, T., Milas, C. and Panagiotidis, T., 2020. A mixed frequency approach for stock returns and valuation ratios. Economics Letters, 187, p.108861.
Dong, J., Korobenko, L. and Deniz Sezer, A., 2020. A variation of Merton's corporate bond valuation model for firms with illiquid but observable assets. Quantitative Finance, 20(3), pp.483497.
El Ghoul, S., Guedhami, O., Kim, H. and Park, K., 2018. Corporate environmental responsibility and the cost of capital: International evidence. Journal of Business Ethics, 149(2), pp.335361.
Frank, M.Z. and Shen, T., 2016. Investment and the weighted average cost of capital. Journal of Financial Economics, 119(2), pp.300315.
Miles, S.J. and Van Clieaf, M., 2017. Strategic fit: Key to growing enterprise value through organizational capital. Business Horizons, 60(1), pp.5565.
Thomas, S.J., Madhanagopal, S. and Ghosh, B., 2017. Analysing Indian GSecs with a Predictive Approach. UshusJournal of Business Management, 16(3), pp.3955.
Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Corporate Finance Assignment Help
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