Question

The Chief Financial Officer (CFO) of the RD Company is interested to identify the value of this company under multiple methods, for example, discounting dividend method using cost of equity or discounting cash flows using WACC. The company has 5 million shares, It has $79 million of debt at an interest rate of 5.0 per cent. The market believes that RD can generate earnings of $14 million before interest and tax in perpetuity, and that RD's beta coefficient is 2.0. RD will pay out its available profits as dividends to its shareholders. Market risk premium is 5.0 per cent and govt bond yields 3.7 per cent. Tax rate is 40 per cent.

2. Calculate market value of RD using suitable methods

Answer 1

Particulars		Amount
Cost of Equity
Risk free rate	A	3.70%
Beta	B	2
Market Risk Premium	C	5.00%
Cost of Equity as per CAPM	D=A+(B*C)	13.70%
Amount available for dividends
Earnings before interest and tax	E	1,40,00,000
Interest (79Mn*5%)	F	39,50,000
Earnings before tax	G=E-F	1,00,50,000
Tax @40%	H=G*40%	40,20,000
Earnings after tax (Available for dividend)	I=G-H	60,30,000
Value of Equity	J=I/D	4,40,14,599
Value of Debt	K	7,90,00,000
Value of Company	J+K	12,30,14,599

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