Sriram Wheels Harvard Case Solution & Analysis

Sriram Wheels Case Solution

Q: 4

To calculate the value of the firm. I have calculated the value of the firm for the year of 2014-2019. frost we have calculated free cash flows and discounted those free cash flows through the formula and the company value was 14.22 and the terminal value was 22 and the equity value was 12,72. Calculations can be seen in Exhibit 2

Q: 5 a.

The equity stake was calculated by dividing the equity value by the number of investments done by mathyu which was 2. And the equity stake was 14%.Calculations are in Exhibit 3

Q: 5 b.

In part b to calculate the return on investment we have calculated by multiplying the equity with mathyu investment and the value of equity and debt was 50% both. And the investment was calculated by dividing the additional stake with mathyu investment which was 251% for calculation refer Exhibit 3 part b

Appendix

Exhibit 1.

Levered Beta (Sriram) Cost of Equity
Average Beta value (Comparable Companies) 0.67 Levered Beta (Sriram) 1.1859
Tax Rate 30% Risk free rate 8%
Debt Equity ratio 1.1 Expected return from market 19%
Levered Beta (Sriram) 1.19 Cost of Equity 21%
Cost of Debt (After Tax) Loan from Bank 1.5
Interest on Loan 0.15 Owners’ Equity 1.5
Loan Amount 1.5 Debt Ratio 50%
Cost of Debt (Interest Rate) 10% Equity Ratio 50%
Tax Rate 30%
After-tax cost of debt 7%
Now we will find WACC through formula
Discount Factor
Cost of Equity 21%
After-tax cost of debt 7%
Debt Ratio 50%
Equity Ratio 50%
Discount Factor (WACC) 14.02%

 (Justifiable)

Exhibit 2

DCF Valuation
  2014 2015 2016 2017 2018 2019
1 2 3 4 5 6
Profit 0.18 0.29 0.40 0.53 0.68 0.72
Add: Interest on loan 0.35 0.35 0.35 0.35 0.35 0.35
EBIT 0.53 0.64 0.75 0.88 1.03 1.07
NOPAT 0.37 0.45 0.53 0.62 0.72 0.75
Add: Depreciation (Total) 0.54 0.54 0.54 0.54 0.54 0.54
Less: Capex 0.25 0.00 0.00 0.00 0.00 0.00
Change in NWC -0.25 0.00 0.00 0.00 0.00 0.00
Free Cash Flows 0.91 0.99 1.07 1.16 1.26 1.29
Discounted FCFs 0.80 0.76 0.72 0.69 0.65 0.59
Terminal Value - - - - - 22.00
Discounted Terminal Value - - - - - 10.01
Company Value 14.22          
Less: Debt Value 1.50          
Equity Value 12.72          

 

Exhibit 3

5 part a. 5 part b.
Equity Allocation Return on Investment
Equity Value 14.02 50% Stake 7.010
Investment by Mathyu 2 Investment by Mathyu 2
Stake in Equity 14% Additional Stake 5.01
    Return on Investment 251%
  1. Equity Stake (Justifiable).............................

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