Page 136 - DMGT409Basic Financial Management
P. 136

Unit 7: Capital Budgeting




                                                                                                Notes
             Since past one year, Mrs. Gupta  was not keeping well. Six months ago, she had a minor
             heart attack. Mrs and Mr. Gupta decided to shift to USA and join their daughter, who was
             a heart specialist at Los Angles, USA. Gupta had no one to succeed him, he decided to sell
             the business. He wanted the buyer to run the business on similar lines and maintain its
             reputation.
             He called RNS  Adwani and made him an offer to sell his business. The initial offer was for
             ` 57.50 lakh. He also proposed to assist RNS  in financing the purchase.

             Gupta provided him with the information on past earnings with projections for fi ve years.

             He also provided him with the Balance Sheet and Profit and Loss Accounts of RNS Motors

             as on 31st  March 2000. He informed RNS  that based upon the business flow, he had
             valued the goodwill as ` 15 lakh.
             RNS  was excited about the offer. He knew that the business was very profitable and its


             profits had been increasing over the years. It had never been at loss. He consulted a friend
             who was a banker and also a Chartered Accountant. He advised him differently. He knew
             there was a scope of negotiation over the price of the business. Now RNS  now needs
             assistance.
             Sales and Profit of Previous Years

                    Net sales              81,95,000                90,34,000
                      PBT                  7,37,500                 7,56,600
                      PAT                  5,25,000                 6,23,200
             Summary of Projected sales and earnings
                 Year        2001        2002        2003       2004        2005
                Net Sales  11,00,000   120,00,000  125,00,000  130,00,000  135,00,000
                 PBT        8,65,000    9,50,000   10,50,000   12,00,000   12,50,000
                 PAT        7,00,000    7,80,000   8,60,000    9,30,000    9,75,000
             Questions
             1.   Evaluate the value of RNS Motors using discounted cash flow and multiple earning

                method (Assume 20% required rate of  return).
             2.  How do you think the banker will value this business? Discuss the method and
                calculate the value.
             3.   If you were the banker, will you fi nance?
             4.   How would you evaluate the good will of RNS Motors.

             5.  As a consultant would you advice Mr. RNS  Adwani to buy RNS Motors or not. Explain
                with reasons.














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