EXHIBIT 1: PROJECTED CASH FLOWS FOR THE HERBO EXPANSION PROJECT (* THOUSANDS) Year 1 2 3 4 5 6 7 Revenue 5,400 6,210 7,141.5 8,212.725 9,444.634 Expenses EBIT 4,860 5,589 6,427.35 7,391.453 540 621 714.15 821.273 8,500.17 944.463 8 10,389.097 11,428.007 12,570.808 9,350.187 10,285.206 11,313.727 1038.91 1,142.801 9 13,827.888 12,445.099 13,689.609 10 15,210.677 1,257.081 1,382.789 1,521.068 Tax (30%) 162 186.3 214.245 246.382 283.339 Net earnings 378 434.7 499.905 574.891 661.124 311.673 727.237 Depreciation (10%) 200 Total cash flows 578 200 634.7 200 699.905 200 774.891 200 861.124 200 927.237 342.84 799.96 200 999.96 377.124 879.957 414.837 967.952 456.32 1,064.747 200 1,079.957 200 200 1,167.952 1,264.747 Note: Herbo Herbo Drugs & Pharmaceuticals; = INR - Indian rupee; US$1 = *79.6613 on September 1, 2022; EBIT = earnings before interest and taxes. Source: Compiled by the authors. EXHIBIT 2: FINANCIALS OF COMPARABLE PUBLIC FIRMS (* MILLIONS) Company Dabur India Limited Total assets Non-current liabilities Market capitalization Net income Equity Debt Kerala Ayurveda Limited Cipla Limited 86,877.3 917.8 4,986.3 947,450.5 333.1 944.73 14,329.3 8.9 257,911.6 5,106 726,960.2 Dr. Reddy's Laboratories 249,684 5,365 769,608.6 Torrent Pharmaceuticals Ltd. 119,541.9 31,806.4 520,309.1 29,579.3 16,232 9,914.5 58,638.7 112.7 225,135.5 183,362 63,454.2 5,601.8 614.6 189.2 22,054 Source Natural Foods and 193.2 5.1 826.5 24.3 156 33,864.7 0.4 Herbal Supplements Limited Note: INR Indian rupee; US$1 =*79.6613 on September 1, 2022. Source: ProwessIQ, accessed March 15, 2023.
EXHIBIT 1: PROJECTED CASH FLOWS FOR THE HERBO EXPANSION PROJECT (* THOUSANDS) Year 1 2 3 4 5 6 7 Revenue 5,400 6,210 7,141.5 8,212.725 9,444.634 Expenses EBIT 4,860 5,589 6,427.35 7,391.453 540 621 714.15 821.273 8,500.17 944.463 8 10,389.097 11,428.007 12,570.808 9,350.187 10,285.206 11,313.727 1038.91 1,142.801 9 13,827.888 12,445.099 13,689.609 10 15,210.677 1,257.081 1,382.789 1,521.068 Tax (30%) 162 186.3 214.245 246.382 283.339 Net earnings 378 434.7 499.905 574.891 661.124 311.673 727.237 Depreciation (10%) 200 Total cash flows 578 200 634.7 200 699.905 200 774.891 200 861.124 200 927.237 342.84 799.96 200 999.96 377.124 879.957 414.837 967.952 456.32 1,064.747 200 1,079.957 200 200 1,167.952 1,264.747 Note: Herbo Herbo Drugs & Pharmaceuticals; = INR - Indian rupee; US$1 = *79.6613 on September 1, 2022; EBIT = earnings before interest and taxes. Source: Compiled by the authors. EXHIBIT 2: FINANCIALS OF COMPARABLE PUBLIC FIRMS (* MILLIONS) Company Dabur India Limited Total assets Non-current liabilities Market capitalization Net income Equity Debt Kerala Ayurveda Limited Cipla Limited 86,877.3 917.8 4,986.3 947,450.5 333.1 944.73 14,329.3 8.9 257,911.6 5,106 726,960.2 Dr. Reddy's Laboratories 249,684 5,365 769,608.6 Torrent Pharmaceuticals Ltd. 119,541.9 31,806.4 520,309.1 29,579.3 16,232 9,914.5 58,638.7 112.7 225,135.5 183,362 63,454.2 5,601.8 614.6 189.2 22,054 Source Natural Foods and 193.2 5.1 826.5 24.3 156 33,864.7 0.4 Herbal Supplements Limited Note: INR Indian rupee; US$1 =*79.6613 on September 1, 2022. Source: ProwessIQ, accessed March 15, 2023.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Herbo is a pharmaceutical company that is eyeing expansion. The entire decision on expansion is dependant on the accurate estimation of WACC. Using the supporting numbers/information below find Herbos; WACC,
-The Initial cost of expansion is around 6.5 million. which would cover capex and working capital. Projected cash flows are below. Sales are expected to grow by 15% for the first five years and 10% for another five. Beyond the
- To find WACC you need to estimate the cost of debt and equity. To find WACC you will need Beta. As Herbo is an unlisted company you can estimate the beta based on comparable firms numbers found in the numbers below.
- The most viable source of debt financing for Herbo was bank loans. The RBI has set the latest lending rate at 8.58 per cent. Herbo can also borrow money from a friend/family member they could negotiate a better rate with a 2% premium on top of the 5.9 repurchase agreement set by the RBI. This would result in a cost of debt of 7.9%. The tax rate for Herbo and all comparable firms is projected to be approximately 30% in the coming years.
Should Herbo expand?
Transcribed Image Text:EXHIBIT 1: PROJECTED CASH FLOWS FOR THE HERBO EXPANSION PROJECT (* THOUSANDS)
Year
1
2
3
4
5
6
7
Revenue
5,400
6,210
7,141.5
8,212.725
9,444.634
Expenses
EBIT
4,860
5,589
6,427.35
7,391.453
540
621
714.15
821.273
8,500.17
944.463
8
10,389.097 11,428.007 12,570.808
9,350.187 10,285.206 11,313.727
1038.91 1,142.801
9
13,827.888
12,445.099 13,689.609
10
15,210.677
1,257.081
1,382.789 1,521.068
Tax (30%)
162
186.3
214.245
246.382
283.339
Net earnings
378
434.7 499.905
574.891
661.124
311.673
727.237
Depreciation (10%)
200
Total cash flows
578
200
634.7
200
699.905
200
774.891
200
861.124
200
927.237
342.84
799.96
200
999.96
377.124
879.957
414.837
967.952
456.32
1,064.747
200
1,079.957
200
200
1,167.952
1,264.747
Note: Herbo Herbo Drugs & Pharmaceuticals; = INR - Indian rupee; US$1 = *79.6613 on September 1, 2022; EBIT = earnings before interest and taxes.
Source: Compiled by the authors.
EXHIBIT 2: FINANCIALS OF COMPARABLE PUBLIC FIRMS (* MILLIONS)
Company
Dabur India Limited
Total assets
Non-current
liabilities
Market
capitalization
Net income
Equity
Debt
Kerala Ayurveda Limited
Cipla Limited
86,877.3
917.8
4,986.3
947,450.5
333.1
944.73
14,329.3
8.9
257,911.6
5,106
726,960.2
Dr. Reddy's Laboratories
249,684
5,365
769,608.6
Torrent Pharmaceuticals Ltd.
119,541.9
31,806.4
520,309.1
29,579.3
16,232
9,914.5
58,638.7
112.7
225,135.5
183,362
63,454.2
5,601.8
614.6
189.2
22,054
Source Natural Foods and
193.2
5.1
826.5
24.3
156
33,864.7
0.4
Herbal Supplements Limited
Note: INR Indian rupee; US$1 =*79.6613 on September 1, 2022.
Source: ProwessIQ, accessed March 15, 2023.
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