From enterprise value to equity value

The case and its answers

Every question of this case, with its answer and why each other option is wrong.

An analyst values a fictional operating business using a simplified one-period free-cash-flow-to-firm model. Free cash flow at the end of year 1 is ₹55 crore. The value of all later operating cash flows, measured at that same year-1 date, is assumed to be ₹660 crore. The annual discount rate is 10%. At today’s valuation date the company has debt of ₹200 crore and excess cash of ₹50 crore, with no minority interest or other non-operating claims. There are 25 crore ordinary shares. The terminal value is an explicit model assumption and must not be treated as cash available today without discounting.

All people, firms, prices and contract terms are fictional.

Ignore taxes and transaction costs unless the case explicitly includes them.

1. Q1What is today’s enterprise value under this model?

   • A

     Option A. ₹500 crore

     Why it is wrong: This is equity value after the debt-and-cash bridge.

   • B

     Option B. ₹715 crore

     Why it is wrong: This is the combined year-1 amount before discounting.

   • C

     Option C. ₹600 crore

     Why it is wrong: This discounts the terminal value but omits year-1 free cash flow.

   • D

     Option D. ₹650 crore — Correct answer

   Answer: D. (₹55 crore + ₹660 crore)/1.10 = ₹650 crore. Remember: Discount each model amount from its stated valuation date.

   Hint, shown before you answer in practice mode: Both ₹55 crore and ₹660 crore are located at the end of year 1.

   XV-S1-C02-Q1mediumnumerical

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2. Q2What equity value remains after adjusting for debt and excess cash?

   • A

     Option A. ₹650 crore

     Why it is wrong: This leaves the enterprise-to-equity bridge undone.

   • B

     Option B. ₹900 crore

     Why it is wrong: This adds debt instead of subtracting it.

   • C

     Option C. ₹400 crore

     Why it is wrong: This subtracts cash instead of adding it.

   • D

     Option D. ₹500 crore — Correct answer

   Answer: D. ₹650 crore − ₹200 crore + ₹50 crore = ₹500 crore. Remember: Enterprise value and equity value have different claim boundaries.

   Hint, shown before you answer in practice mode: Debt holders have a claim. Excess cash is added for equity holders.

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3. Q3What model value per ordinary share follows?

   • A

     Option A. ₹26

     Why it is wrong: This divides enterprise value by ordinary shares.

   • B

     Option B. ₹20 — Correct answer

   • C

     Option C. ₹28.60

     Why it is wrong: This divides the undiscounted year-1 amount by shares.

   • D

     Option D. ₹2

     Why it is wrong: This introduces an unnecessary crore conversion on only one side.

   Answer: B. ₹500 crore ÷ 25 crore shares = ₹20 per share. Remember: Use equity value, not enterprise value, to value ordinary shares directly.

   Hint, shown before you answer in practice mode: Divide equity value by ordinary shares in matching units.

   XV-S1-C02-Q3mediumnumerical

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4. Q4Which model input deserves especially careful sensitivity analysis because it contributes most of the operating value?

   • A

     Option A. The discount rate is irrelevant when a terminal value is given.

     Why it is wrong: The terminal amount still must be discounted.

   • B

     Option B. The ordinary share count can be ignored.

     Why it is wrong: Share count directly changes per-share value.

   • C

     Option C. The ₹50 crore cash must be treated as revenue.

     Why it is wrong: Excess cash belongs in the equity bridge, not operating revenue.

   • D

     Option D. The assumed ₹660 crore terminal value. — Correct answer

   Answer: D. The terminal assumption is much larger than the ₹55 crore explicit cash flow. Small changes can materially affect enterprise and equity value. Remember: A precise model output can still depend heavily on uncertain assumptions.

   Hint, shown before you answer in practice mode: Compare the sizes of the two year-1 value components.

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