Emerging Leaders Program - Manufacturing Business & Project Finance

Facilitator: Prof Kousik Guhathakurta

Caselet 1 Chota Bachchas Free Idea Chhota Bachcha, the ever promising Indian film star, son of Indian Film Supernova Big Bachcha and Tiny Bachcha, wants to shift to business (Undaunted by the infinite failures of his father in this direction). He decides to float a consultancy firm called Free Idea. He initially gathers some data from his friends (all expert failures as businessmen). The summary of his initial findings are as follows; Initial Capital Requirement: Papas Guarantee) ` 100 m (To be provided by Bank on

Net Revenue Schedule in ` million Yr 1 2 7 4 3 7 4 4 7 4 5 10 7 6 10 7 7 Grow at 5% Grow at 5%

Revenue 5 Cost 6

Maximum Interest rate from Bank: 11.5% Based on this he has to come to a decision.

Any resemblance to any real personality, either living or dead is purely coincidental

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Emerging Leaders Program - Manufacturing Business & Project Finance

Facilitator: Prof Kousik Guhathakurta

Caselet 2 From Where to get money? Chota Bachcha got a shock when he actually went to market for his funds. First, his Papa refused to stand Guarantee for such a large amount (Papas Boy got a rude shock). But Tiny Bachcha stepped in with some of her jewellery as collateral. One Bank agreed to provide 25% of the fund @12.5% per annum. Then he remembered one of his films, Dada, where he played a business tycoon (some said he really acted well!) who always went to public to help him out in times of despair. So he decided to go public. He had two choices: Raise further 25% through debentures. His Debentures will be rated BBB and fetch a cost of Debt of 13% and the rest through equity. Alternatively he can raise the entire capital through equity. The unlevered Beta of similar business is 1.5. The treasury bonds are giving 6.5% per annum yield. The average market premium is about 7%. Chota Bachcha is now in a dilemma from where he is going to fetch his money. The present corporate tax rates are to be considered.

Any resemblance to any real personality, either living or dead is purely coincidental

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Emerging Leaders Program - Manufacturing Business & Project Finance

Facilitator: Prof Kousik Guhathakurta

Caselet 3 Buy Buy Business Chota Bachcha to everybodys surprise (and his friend RickRick Seshans dismay) is carrying on with his business quite well and is into his 5th year of business. But now he is tired of his business and decides to go back to his stardom days (was there any? Well he thinks there was). He now decides to put his business on sale. He wishes to value his business. He is confronted with the following details: Adjusted EBIT (1-t) Capital investment Depreciation Net Change in WC ` 1.950m ` 0.535m ` 0.035m ` .635m

The business is expected to grow at 6.5% for the next ten years after which it will stabilise at that level. The Re-investment rate is going to remain same. Cost of capital depends on the capital structure he chose earlier. If he puts up price tag of ` 500 m, will he be able to sell?

Any resemblance to any real personality, either living or dead is purely coincidental

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