BBA/ B.Com Financial Modelling SEP 2025

Description

Financial Modeling

Sep 2025 Examination

 

 

Q1. Sunrise Technologies Ltd. recently declared an annual dividend of Rs.5 per share. The company expects dividends to grow at 6% per year for the next 3 years and then stabilize at a long-term growth rate of 8% per annum indefinitely. If the required rate of return on equity is 12%, calculate the current intrinsic value of Sunrise Technologies Ltd.’s shares using an appropriate dividend discount model. (10 Marks)

Ans 1.

Introduction

Evaluating the intrinsic value of a company’s shares is essential for investors and financial analysts, especially when making long-term investment decisions. Dividend Discount Models (DDMs) are commonly used to estimate the present value of future cash flows in the form of dividends. DDM is particularly useful when a company follows a stable dividend policy and has predictable growth in dividends. Sunrise Technologies Ltd., having recently declared a dividend of Rs. 5 per share and forecasting dividend growth at 6% for the next 3 years followed by a stable growth of 8% indefinitely, fits perfectly into a two-stage DDM. This valuation approach will help estimate the fair value of its shares based on

 

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Q2. Riviera Ltd., a mid-sized FMCG company listed on the stock exchange, has the following information:

Risk-free rate (Rf): 6%, Expected market return (Rm): 14%, Beta: 1.3, Pre-tax cost of debt: 9%, Corporate tax rate: 30%, Book value of equity: Rs.150 crore, Book value of debt: Rs.100 crore, Management’s estimated required rate of return: 18%. Calculate the company’s weighted average cost of capital (WACC) based on the given capital structure. Based on your calculation, assess whether the new project should be accepted in light of management’s expected rate of return. (10 Marks)

Ans 2.

Introduction

In corporate finance, the Weighted Average Cost of Capital (WACC) is a crucial metric used to assess the cost a company incurs for using capital from different sources—primarily equity and debt. WACC is a blended rate that reflects the average rate of return required by equity holders and debt providers, adjusted for tax benefits on debt. It serves as the hurdle rate against which new investment projects are evaluated. Riviera Ltd., a mid-sized FMCG firm, seeks to determine its WACC to decide whether a new project is financially viable. By calculating the cost of equity through the Capital Asset Pricing Model (CAPM)

 

 

Q3 (A) Arti Ventures Pvt. Ltd., a mid-sized food processing company, is preparing for a private equity investment round. Two financial consultants have proposed different valuation methods: one suggests using the Income Approach, while the other recommends the Market Approach. Explain the key differences between the Income Approach and the Market Approach to business valuation to assist the management in making an informed decision. (5 Marks)

Ans 3a.

 

Introduction

When raising private equity, management must select a valuation approach that credibly reflects economic reality, withstands investor scrutiny, and aligns with data availability. Arti Ventures Pvt. Ltd., operating in food processing—a sector influenced by margins, input volatility, capacity utilization, and distribution scale—may be valued differently depending on

 

 

Q3 (B) Neo Plastics Ltd., a mid-sized manufacturing firm, is being valued using the Discounted Cash Flow (DCF) approach. The company projects its Free Cash Flows (FCF) over the next three years as follows:

Year 1: Rs.10 crore Year 2: Rs.12 crore Year 3: Rs.14 crore

After Year 3, the free cash flows are expected to grow at a constant rate of 5% per annum. The company’s Weighted Average Cost of Capital (WACC) is 10%. Using this information, calculate the Enterprise Value (EV) of Neo Plastics Ltd. (5 Marks)

Ans 3b.

Introduction

Discounted Cash Flow (DCF) valuation estimates enterprise value by projecting the free cash flows a business will generate and discounting them at the firm’s Weighted Average Cost of Capital (WACC). Neo Plastics Ltd., a manufacturing firm, has provided management cash