Business Valuation JUNE 2026

Description

Business Valuation

Jun 2026 Examination

 

 

Q1. Ms. Neha plans to invest Rs.8,00,000 in a fixed deposit for 7 years at an annual interest rate of 12%. Calculate the Effective Annual Rate (EAR) and the maturity value (future value) of the investment assuming interest is compounded once a year, 2 times a year, 4 times a year, and every month. Comment on the results. (10 Marks)

Ans 1.

Introduction

The time value of money is a fundamental concept in finance that recognizes that a rupee received today is worth more than a rupee received in the future. When an investment earns compound interest, the frequency of compounding directly affects the actual return earned and the final maturity value. The Effective Annual Rate reflects the true annualized return after accounting for the number of compounding periods within a year. A higher compounding frequency results in a higher EAR and therefore a larger maturity value, even though the nominal annual rate remains the same. This principle has important implications for investment decisions, loan comparisons, and business

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Q2 (A). BlueWave Infrastructure Ltd. is being evaluated for acquisition by a private equity firm. During negotiations, both parties agree that the company’s assets and liabilities should not be considered at their historical book values shown in the balance sheet. Instead, independent professional valuers are appointed to reassess all major assets and liabilities at their fair market value as on the valuation date before determining the company’s overall worth. Identify the valuation method being used and explain how it is calculated. Also discuss its relevance in this situation. (5 Marks)

Ans 2(A).

Introduction

The valuation method being used in this scenario is the Adjusted Net Asset Value method, which is a variant of the asset-based approach to business valuation. Unlike the book value method that relies on historical cost figures from financial statements, the Adjusted NAV method restates all assets and liabilities at their current fair market value as on a specific valuation date. This makes it one of the most reliable methods for acquisition transactions where both parties need an economically

 

Q2 (B). XYZ Retail Ltd, a chain of supermarkets operating across South India, reported the following financial data for the year ended March 2026: Net Profit after Tax: Rs.8,00,000, Shareholders’ Equity: Rs.40,00,000, Total Revenue: Rs.1,20,00,000, Total Assets: Rs.60,00,000. Based on the above information, calculate the Return on Equity (ROE) and Asset Turnover Ratio. Briefly interpret what these ratios indicate about the company’s profitability and efficiency. (5 Marks)

Ans 2(B).

Introduction

Financial ratios translate raw accounting figures into meaningful performance indicators that help investors, management, and acquirers assess a company’s operational effectiveness and return generation capacity. Return on Equity measures how efficiently the company generates profits from shareholders’ capital, while the Asset Turnover Ratio measures how effectively total assets are used to generate revenue. Together these two ratios provide insight into both profitability and