PART - III - Udyog Bandhu

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For example, the following profit and loss account shows the computation of the Profit BeforeDepreciation, Interest and Tax (PBDIT) of Company X for the first year of businessprojections:Figure 1: Profit and loss account of Company XRs millionRevenueSales receipts 500ExpensesConsumption of material 300Other overheads 50Total expenses 350PBDIT 150Computation of Free Cash Flow to Firm (‘FCF’): Free cash flow (FCF) for a year is derivedby deducting the total of annual tax outflow inclusive of tax shield enjoyed on account of debtservice, incremental amount invested in working capital and capital expenditure from therespective year’s profit before depreciation interest and tax (“PBDIT”) for the explicit period.Therefore, for Company X, the computation of FCF would look like the following:Figure 2: FCF computation for Company XRs millionYear 1 Year 2 Year 3 Year 4 Year 5PBDIT of Company X * 150 200 300 400 500Less: Income tax (assumed) -20 -40 -60 -80 -100Less: Capital expenditure (assumed) -50 -50 -50 -50 -50Less: Incremental working capital (assumed) -25 -50 -75 -100 -125FCF 55 60 115 170 225* Notice that a growth has been assumed in the PBDITWeighted Average Cost of Capital (‘WACC’)The FCF is then discounted at a discount rate, which represents the WACC. The computationof the WACC is set out below:Figure 3: WACC parametersCost of equityRisk Free RateBetaAssumptionYield to maturity on Government of India Securities based on currenttraded value (preferably these should be of a long-term tenor beyond theforecast period i.e. minimum 10 years)For the purpose of analysis, average unlevered beta of listed industrycomparables is computed, which is then levered to the Company’s owntarget debt equity ratioThe levered (equity) Beta of a scrip is a measure of relative risk tomarket, arithmetically computed as covariance of equity and marketreturn divided by variance of market return (over a long historical datarun) followed with certain adjustments140
Equity Risk Premium = Beta * (Market Risk Premium)Market Risk Premium is equal to the difference of average market returnand risk free rate #Cost of EquityCost of debtEstimated CorporateTax RateComp’s Pre-Tax Costof Debt=Risk Free Rate + (Equity Risk Premium*Beta)Current corporate tax rate in IndiaCost of debt provided by the ManagementComp’s After-Tax Pre-Tax Cost of Debt*(1-Tax Rate) @Cost of DebtTarget Debt equityratioAverage debt equity ratio of the CompanyWACC (Debt/Total Capital)*(After-Tax Cost of Debt)+(Equity/TotalCapital)*(Cost of Equity)@This is the tax shield referred to earlier.# Higher the beta means more riskier the stock, beta = 1 means the stock of thecompany is in perfect synchronise with the sensex (average market return). Higher thanone means the stock is more volatile (and hence more risky) than the sensex and lowerthan one means the stock is less volatile (and hence less risky).To illustrate, for Company X, the computation of WACC typically could be as follows:Figure4: WACC calculation for Company XCost of EquityAssumptionsRisk Free Rate 9.00% 10-year Treasury GoI Bond YieldBeta 1.50 Unlevered beta of industry comparables, levered to Company Xdebt equity ratio (high risk stock!)Equity Risk Premium 9.00% Total Stock Returns less Treasury Bond Total Returns. MarketRisk Premium is equal to the difference of average marketreturn and risk free rate. Average market return has beenassumed to be 18% and beta has been assumed to be 1.5.Cost of Equity 22.50% = Risk Free Rate + (Equity Risk Premium*Beta)Cost of DebtEstimated Corporate TaxRateComp’s Pre-Tax Cost ofDebtComp’s After-Tax Costof Debt35.70% Current corporate tax rate in India16.50% Cost of debt provided by the Management10.61% Pre-Tax Cost of Debt*(1-Tax Rate)Target Debt equity ratio 1.00 Average debt equity ratio of Company X for past five yearsWACC 16.55% (Debt/Total Capital)*(After-Tax Cost of Debt)+(Equity/TotalCapital)*(Cost of Equity)141
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Executive Summary1. The procedure t
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Disinvestment - Process Flow ChartD
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2. The Core Group Committee of Secr
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Legal advisors examine the followin
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CHAPTER - IIVARIOUS METHODOLOGIES F
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- Ensures broad based shareholding-
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- Enhances visibilityDisadvantages-
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Regulation: RBI restrictions on ban
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- Low cost of transaction- Relative
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CHAPTER - IIISTRATEGIC SALEThe vari
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3. Management Organizationi) An ove
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Page 30 and 31: pertaining to employer - employee r
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Page 36 and 37: 3.2.8 Submission of final bidDetail
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Page 41 and 42: Similarly if the closing date debt
Page 43 and 44: CHAPTER -IVVALUATIONIn any sale pro
Page 45 and 46: SECTION 9-ANOTICE OF CHANGENo emplo
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Page 49 and 50: Substantive Clauses:Notwithstanding
Page 51 and 52: Annexure-IAgreement For Advisory Se
Page 53 and 54: NAME) will be paid a drop-dead fee
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Page 57 and 58: 13. Governing LawThis Agreement sha
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Page 61 and 62: Annexure-IIGuidelines for Advisors
Page 63 and 64: Annexure-IIIEXPRESSION OF INTEREST(
Page 65 and 66: Annexure-IVStatement Of Legal Capac
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Page 75 and 76: Annexure - VIIVALUATION METHODOLOGI
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Page 87 and 88: It should be noted that the DCF met
Page 89: 6 - Disqualification of a bidder by
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PART - III - Udyog Bandhu

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