A sum-of-the-parts valuation with a stress case

The case and its answers

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

A diversified company has three operating divisions with estimated enterprise values of ₹300 crore, ₹200 crore and ₹150 crore. A separate present value of unallocated corporate overhead is ₹40 crore and has not been included in those divisional estimates. At the valuation date the company has debt of ₹200 crore, excess cash of ₹50 crore and 20 crore ordinary shares, with no minority interests. In a downside scenario only the second division’s enterprise value falls by 25%. Every other input remains unchanged. The values are independent estimates, not sale offers. Avoid double-counting overhead or cash when moving from the divisional values to the parent’s equity value.

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

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

1. Q1What is the sum of divisional enterprise values before overhead?

   • A

     Option A. ₹460 crore

     Why it is wrong: This is base equity value after all adjustments.

   • B

     Option B. ₹650 crore — Correct answer

   • C

     Option C. ₹610 crore

     Why it is wrong: This already subtracts the separate overhead adjustment.

   • D

     Option D. ₹600 crore

     Why it is wrong: This is the stressed divisional total.

   Answer: B. ₹300 + ₹200 + ₹150 = ₹650 crore. Remember: A sum-of-the-parts model starts with clearly defined component values.

   Hint, shown before you answer in practice mode: Add the three divisional values.

   XV-S3-C02-Q1easynumerical

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2. Q2What is base equity value after overhead, debt and excess cash?

   • A

     Option A. ₹360 crore

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

   • B

     Option B. ₹860 crore

     Why it is wrong: This adds rather than subtracts debt.

   • C

     Option C. ₹500 crore

     Why it is wrong: This omits the separate overhead value.

   • D

     Option D. ₹460 crore — Correct answer

   Answer: D. ₹650 − ₹40 − ₹200 + ₹50 = ₹460 crore. Remember: Apply each corporate-level adjustment exactly once.

   Hint, shown before you answer in practice mode: Subtract overhead and debt. Add excess cash.

   XV-S3-C02-Q2mediumnumerical

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3. Q3What is base equity value per share?

   • A

     Option A. ₹32.50

     Why it is wrong: This uses the unadjusted divisional total.

   • B

     Option B. ₹20.50

     Why it is wrong: This is the stressed per-share value.

   • C

     Option C. ₹25.00

     Why it is wrong: This omits overhead.

   • D

     Option D. ₹23 — Correct answer

   Answer: D. ₹460 crore ÷ 20 crore shares = ₹23 per share. Remember: Per-share valuation requires the equity claim after corporate adjustments.

   Hint, shown before you answer in practice mode: Divide equity value by the ordinary share count.

   XV-S3-C02-Q3mediumnumerical

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4. Q4What per-share value results from the specified downside scenario?

   • A

     Option A. ₹17.25

     Why it is wrong: This reduces the entire base equity value by 25%.

   • B

     Option B. ₹23.00

     Why it is wrong: This ignores the stressed division.

   • C

     Option C. ₹20.50 — Correct answer

   • D

     Option D. ₹21.75

     Why it is wrong: This understates the ₹50 crore divisional reduction.

   Answer: C. The second division loses ₹50 crore. Equity becomes ₹460 − ₹50 = ₹410 crore. ₹410/20 = ₹20.50 per share. Remember: A scenario should change only the inputs specified.

   Hint, shown before you answer in practice mode: Only the ₹200 crore division falls by 25%.

   XV-S3-C02-Q4hardnumerical

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