Business Valuation DEC 2025

Description

Business Valuation

Dec 2025 Examination

 

 

Q1. Mr. Sharma has Rs.80,000 to invest for 3 years. He is choosing between two short- term offers:

– Instrument A (Bank Fixed Deposit): Quoted 5.2% p.a. nominal, compounded quarterly.

– Instrument B (Company Deposit): Simple interest at 6% p.a. for 3 years.

Calculate the Effective Annual Rate (EAR) and maturity value for Instrument A after 3 years. Also compute the maturity value of the Rs.80,000 invested in Instrument B after 3 years. Comment which instrument gives a higher maturity amount for Mr. Sharma and why? (10 Marks)

Ans 1.

Introduction

Investment decisions often require careful comparison between different financial instruments that appear attractive at first glance but differ in terms of interest calculation methods, compounding frequency, and effective yields. Mr. Sharma’s case presents such a choice where he has ₹80,000 to be invested for a fixed horizon of three years. He can either select a bank fixed deposit carrying a quoted nominal rate with quarterly compounding or a company deposit that offers a higher simple

 

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Q2(A). ABC Pvt. Ltd., a family-owned business, is considering (a) selling part of the promoters’ stake to raise funds, (b) acquiring a small competitor, and (c) managing a shareholder’s exit. In which of these situations would a company valuation be necessary, and why is it important for each case? (5 Marks)

Ans 2a.

Introduction

Company valuation is a vital exercise that helps stakeholders determine the fair economic worth of a business in different situations. For ABC Pvt. Ltd., a family-owned enterprise, decisions such as selling part of the promoters’ stake, acquiring a competitor, or managing a shareholder’s exit cannot be taken without a clear understanding of value. A valuation provides a reliable basis for negotiation, ensures transparency, and protects the interests of both current and potential investors, making it

 

Q2 (B). LMN Ltd. reported the following financial information for the year ending March 2024: Revenue of Rs.10,00,000, Cost of Goods Sold of Rs.6,50,000, Operating Expenses of Rs.2,00,000, and Interest & Taxes of Rs.50,000. Calculate Gross Profit Margin Net Profit Margin. Briefly interpret the results. (5 Marks)

Ans 2b.

Introduction

Financial ratios such as gross profit margin and net profit margin are vital indicators of a company’s efficiency and profitability. They provide insights into how well a firm controls its direct production costs and how effectively it manages overall expenses. In the case of LMN Ltd., with revenues of ten lakh rupees, the calculation of these margins allows stakeholders to judge whether the company is generating sufficient returns from its operations and whether costs are being managed to