BAO 5534: Business Finance - Equity Valuation Process - SAGE Business Case Study - Accounting and Finance Assignment Help

Assignment Task:

Introduction:

The main objective of this assignment is to emphasis on understanding the concept and framework of equity valuation and capital budgeting and investment decision making. It will 
• cover various valuation methodologies used by analyst globally for arriving the right investment decision,
• the key mechanics and assumptions of the dividend discount model and its variants, 
• the computation of cost of equity for determination of discount rate, after-tax operating cash flows for capital budgeting analysis, (taking into account the revenues, costs, depreciation and working capital),
• net present value and internal rate of return.

Students should be able to discuss and identify the various information required for the financial evaluation of investment proposals. Your answers in this assignment should be mainly focused on those topics.

ASSIGNMENT TASKS:

Task 1:
Write a comprehensive essay on the application of equity valuation process followed by financial analysts. Your essay should cover:
1. The process and framework of equity valuation generally followed by financial analysts
2. The various valuation methodologies used by analysts globally for estimating the value of equity stock.
3. The concept of the dividend discount valuation model and its key steps and assumptions.
4. Strength and weakness and similarities and dissimilarities of each method you identified.

Task 2:
Answer questions in the case study given below(Extracted from SAGE Business Cases - Varun Dawar (2018) - Capital Budgeting Decision Analysis. Some contents of the case have been altered to suit the local condition).

Case:

CAPITAL BUDGETING DECISION ANALYSIS:

Introduction:

On September 20, 2018, Saurabh Sharma, Senior Vice President of Bhatia Textiles Company, was preparing for a meeting with the management committee scheduled the next week. On his desk were a capital budgeting and investment proposal – a new product line of branded shirts that the committee was considering for launch. As the head of the finance department, Saurabh was required to work along with his team on a detailed capital budgeting analysis and present the findings to the management committee for their approval. As per standard company practice, each capital budgeting and investment project was evaluated using the traditional Net Present Value (NPV) approach and the Internal Rate of Return (IRR) criterion for determining whether the company would undertake the project or not.
 
Saurabh had a lot to think about as he considered the analysis of the capital budgeting project using the traditional Net Present Value (NPV) approach and the Internal Rate of Return (IRR) criterion. What would be the basis for calculating the after-tax operating cash flows for the capital project? How would he arrive at the depreciation and working capital requirements for computing the NPV? What would be the basis for calculating the terminal year cash flows? With all these questions in mind, Saurabh decided to focus on the proposed capital budgeting project for the next few days. 

Company Background:
 
Bhatia Textiles is a small, privately-owned clothing company based in New Delhi, India. It was founded in 1995 by Harish Bhatia, a retired executive. Since then, the company had grown steadily by catering to the middle to low-income consumers in the Delhi-National Capital Region (NCR). The company recorded stellar growth of 50% in its sales during the last financial year of 2017–18. With a healthy operating margin ratio and low leverage levels, the company had been able to grow its profits at a compounding annual growth rate of 25% during the last 10 years. With a good brand name and healthy financial metrics, the company was now looking to expand its footprint to new product lines catering to the middle to high-income customers.

Project Investment Proposal Details:

The project is estimated to be of 10 years duration. It involves setting up new machinery with an estimated cost of as much as INR 500 million, including installation. This amount could be depreciated using the straight-line method (SLM) over a period of 10 years with a resale value of INR 15 million. The project would require an initial working capital of INR 20 million. With the planned new capacity, the company would be able to produce 225,000 pieces of shirts each year for the next 10 years. In terms of pricing, each shirt can initially be sold at INR 1,300 apiece, which takes into account the target segment and competitor pricing. The project proposal incorporates an annual increase of 3% in the price of the shirt to compensate for the inflationary impact. With regards to the raw material costs and other expenses, the project estimated the following details:

Discussion Questions:

1. Why are capital budgeting decisions important for a business firm? Discuss their concept and significance
2. Discuss the types of information generally required for evaluating the capital budgeting decisions of a firm from a financial standpoint.
3. What is meant by the Net Present Value (NPV) technique? Discuss its key assumptions and calculation methodology (including an estimation of the discount rate).
4. Explain the concept of the Internal Rate of Return (IRR). What is the criterion generally used by firms while accepting or rejecting a capital budgeting project on the basis of the IRR technique?
5. On the basis of the financial information given in the case, calculate the after-tax operating cash flows, NPV, and IRR under the Optimistic and Expected scenarios. Clearly specify the calculations required for the same.
6. Based on your analysis, as Saurabh Sharma, what recommendation would you make on whether the company should undertake the project or not? Clearly specify the decision based on both the NPV technique as well as the IRR criterion.

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