Pharma, what is the intrinsic value per share! MINICASE - 11 Jagan Reddy, the MD of Reddy Lifestyle was much dejected when his bankers simply refused any additional funding for his company. Somehow they didn't seem to share his enthusiasm over the company's prospects. Coming out of the bank, he called his CFO and close confidante Ram Rao. After showering a couple of choice adjectives on the bank manager he sobered down: What is the point in blaming the bank? Anyone can see that our stock is one of the worst performers in the market. Any idea why it is jinxed? Frankly, I have had enough of this useless furniture business. It can take us only thus far. Now, here is a secret-just keep it strictly to yourself: I think the time has come to unlock value in our old land investments. We can easily diversify into realty business by the end of this year. We will then raise the needed funds by placing equity privately at a good premium. We can flaunt a growth rate as high as forty percent for the first four years and a fair twelve percent thereafter. All that is needed is a bit of guts! I will give you a whole six months' time to work on those hardnosed directors to make them see the writing on the wall, so that when I eventually come up with the real estate idea, they would jump for it. Enough for the day. Tomorrow we will discuss these in detail. Specifically I want you to come up with some answers, even if approximate for the following: of Bonds and Stocks 7.33 1. For our immediate need of ? 10 crores, I think the only way left is to go for a new series of unr secured debentures. Could you figure out the coupon rate we will have to offer for a five year issue now at par? 2. What should be our P/E ratio if we go for the new debenture issue? Also, based on our current earnings prospects, come up with some convincing calculations to show why our stock would continue to be a laggard in the market if we just stick to the present furniture business. 3. At what possible price would we be able to place the shares privately after a year, assuming that the board approves the diversification? Also let me know what would be the present value of growth opportunities then?' If you were the CFO, how would you have worked out the solutions for the above queries with the following data? Currently the company's 8 percent coupon debentures of face value of 100, with a remaining maturity of five years are trading at 90 per debenture. The current market price per equity share of face value #10 of the company is 24.70 and the average P/E multiple for the industry is 14. For simplicity you assume that the profitability, payout and turnover ratios remain unchanged. You decide to use a discount rate of 15 percent for the diversified company. The summarised financial statements of the company for the year ended just now are as under: in millions) Net sales Equity capital Reserve & surplus Cost of goods 495 Total 530 Gross profit . PBIT 92 Interest 20 Fixed assets PBT Investments Net current assets 625 250 80 200 Loan funds 130 410 20 100 530 72 22 50 30 Tax Total PAT Dividend Pharma, what is the intrinsic value per share! MINICASE - 11 Jagan Reddy, the MD of Reddy Lifestyle was much dejected when his bankers simply refused any additional funding for his company. Somehow they didn't seem to share his enthusiasm over the company's prospects. Coming out of the bank, he called his CFO and close confidante Ram Rao. After showering a couple of choice adjectives on the bank manager he sobered down: What is the point in blaming the bank? Anyone can see that our stock is one of the worst performers in the market. Any idea why it is jinxed? Frankly, I have had enough of this useless furniture business. It can take us only thus far. Now, here is a secret-just keep it strictly to yourself: I think the time has come to unlock value in our old land investments. We can easily diversify into realty business by the end of this year. We will then raise the needed funds by placing equity privately at a good premium. We can flaunt a growth rate as high as forty percent for the first four years and a fair twelve percent thereafter. All that is needed is a bit of guts! I will give you a whole six months' time to work on those hardnosed directors to make them see the writing on the wall, so that when I eventually come up with the real estate idea, they would jump for it. Enough for the day. Tomorrow we will discuss these in detail. Specifically I want you to come up with some answers, even if approximate for the following: of Bonds and Stocks 7.33 1. For our immediate need of ? 10 crores, I think the only way left is to go for a new series of unr secured debentures. Could you figure out the coupon rate we will have to offer for a five year issue now at par? 2. What should be our P/E ratio if we go for the new debenture issue? Also, based on our current earnings prospects, come up with some convincing calculations to show why our stock would continue to be a laggard in the market if we just stick to the present furniture business. 3. At what possible price would we be able to place the shares privately after a year, assuming that the board approves the diversification? Also let me know what would be the present value of growth opportunities then?' If you were the CFO, how would you have worked out the solutions for the above queries with the following data? Currently the company's 8 percent coupon debentures of face value of 100, with a remaining maturity of five years are trading at 90 per debenture. The current market price per equity share of face value #10 of the company is 24.70 and the average P/E multiple for the industry is 14. For simplicity you assume that the profitability, payout and turnover ratios remain unchanged. You decide to use a discount rate of 15 percent for the diversified company. The summarised financial statements of the company for the year ended just now are as under: in millions) Net sales Equity capital Reserve & surplus Cost of goods 495 Total 530 Gross profit . PBIT 92 Interest 20 Fixed assets PBT Investments Net current assets 625 250 80 200 Loan funds 130 410 20 100 530 72 22 50 30 Tax Total PAT Dividend