In this segment, you will look at the questions that you need to answer in order to reach the decision of buying Green Energy, along with the project evaluation and investment evaluation questions.

Question 1

Before moving on to evaluating the company, let's modify the balance sheet to simplify our further calculations. Use the balance sheet template provided to create a balance sheet showing capital employed on the left and invested capital on the right side. The original balance sheet has been attached below the question. (5 marks)

Question 2

Now, consider a case that you buy the Green Energy Company but due to an unexpected liability, you are unable to go into production. This would mean that there is no extra benefit that the company would be able to generate post-acquisition. How much would you be willing to pay for the company in this case? Show the calculations in the submission document. (3 marks)

Assumptions:

• Consider that you would be able to utilise all the plants and equipment
• The account receivables are from the customers, with a possibility of collecting 90% of the amount

Question 3

Now, consider the original case of when you were planning to buy the company. You would be able to utilise all the company resources after acquiring the company. So, you ask your team to evaluate the company and the possible changes that can be done to increase sales. After a week, your team present you with these suggestions and assumptions that will be used for valuing the company.

• As a conservative survey, the researchers have only assumed a growth scenario for the next 4 years. From year 5 onwards, the values remain constant
• Revamping the machinery to increase the output would result in a 10% reduction in production cost, along with a 5% reduction in administrative costs. This would cost Rs 2000 Lakhs which will be depreciated over 4 years
• This revamp would help in increasing the revenue by 10% each year for the next 4 years and then it becomes a constant
• The downside to the revamp would be an increase in the time it takes for the product to be ready. Although it does take only a few extra minutes, the quantity of the product translates to a roughly 5% increase in the working operating capital
• The cost of goods and tax rate would be a constant percentage of the sales revenue
• The discount rate has been assumed to be 10%

Utilise these assumptions to calculate:

• The free cash flows for the Years 0-5 (10 marks)
• The terminal value (2 marks)

The relevant data of the income sheet has been attached here for your reference

Question 4

After the initial rounds of research, you set up a meet with the current owners of the company to understand their sentiment towards this buy-out. In the discussion, the owners mentioned the selling price of the company as Rs 5,00,000 Lakhs.

Use the discounted cash flow method to calculate the value of equity and arrive at a decision of buy/no-buy. If it's a no-buy, quote the maximum possible amount that you would be willing to pay to acquire the company. (5 marks)

What would be the share price if there are 1 Crore shares of the Green Energy Company in the market? (1 mark)

Question 5

Now, once you have acquired the company and are doing well, you decide to open up one more plant for expanding the production facility. But there are three options from which you have to choose which location you want to invest. These options are provided in the data set shared below.

oose one location that is most suitable for investing (2 marks) Determine the NPV and IRR for each project. (6 marks)

Question 6

Consider an investor who wants to invest in the Green Energy Company. The following sheet contains data that shows the weekly average of prices from Jan 2014 to Aug 2021.

• Calculate the expected return and risk in the stock. (2 marks)
• Calculate the return and risk for TATA Steel for the same period. (2 marks)
• Consider returns per risk unit. Assume that TATA Steel has been labelled as a "BUY" based on this ratio. Comment whether the investor should buy the Green Energy Company's stock. Note that the higher the ratio, the better the stock. (2 marks)