Should the buyer raise its bid?
DCF and equity value · 15 min · Fictional interview case
The situation
A buyer is negotiating for a regional diagnostics chain. The chain has already paid to open its labs, and the analyst expects annual cash generation to stabilize after a short ramp-up. The seller wants ₹210 crore for the shares.
Build a small discounted cash flow model, convert the operating value to share value, and tell the buyer whether the proposed price is supported by the model.
- Cash for lenders and shareholders
- ₹18 crore in year one; ₹22 crore in year two; ₹24 crore annually from year three
- Discount rate / long-run growth
- 10% / 0%
- Debt / excess cash / asking equity price
- ₹45 crore / ₹10 crore / ₹210 crore
Your task
What equity value follows from the forecast, and would you recommend paying the seller’s price on that basis?
Reveal step-by-step solution
Value the later cash flows
At the end of year two, the flat cash stream is worth ₹24 ÷ 0.10 = ₹240 crore.
Bring each amount to today
Operating value = ₹18 ÷ 1.10 + (₹22 + ₹240) ÷ 1.10² ≈ ₹232.89 crore.
Bridge to equity and recommend
Subtract debt and add excess cash to get about ₹197.89 crore. The seller asks about ₹12.11 crore more. Show how the result changes before recommending a higher bid.
Interviewer follow-up
What if annual cash from year three falls to ₹21 crore?
Compare your answer
The continuing value falls by ₹30 crore at year two, about ₹24.79 crore today. Equity value falls to about ₹173.10 crore.