Attempt Questions based upon the following case study:
AZ Ltd. is considering to acquire BC Ltd. for the expansion of business operation. It is
considering ‘income approach’ for the valuation of the business of BC Ltd. In income
approach of business valuation, a business is valued at the present value of its future earnings
or cash flows. Future earnings/cash flows are determined by projecting the business’s
earnings/cash flows and adjusting them for changes in growth rate, cost structure and taxes,
etc. The present value is determined using a discount rate which reflects the required rate of
return of the investor. The businesses of AZ Ltd. and BC Ltd are valued at Rs.100 crore and
Rs.25 crore respectively. The growth rate of BC Ltd. is 8% and of AZ Ltd. is 16%. The
required rate of returns of AZ Ltd. and BC Ltd. are 18% and 12% respectively. PATs of the
AZ Ltd. and BC Ltd. are Rs.1000 crore and Rs.450 crore respectively.
(d = Discount rate, g =
Growth rate)