HYUNDAI’S FATE IN PAKISTAN
CASE STUDY SOLUTION
e
pl
m
SYNOPSIS
The sales manager and team of Hyundai Nishat Motor (Private) Limited (Hyundai Nishat) were discussing the
Sa
expansion of Hyundai to increase the company’s success in Pakistan. But the main issue with the expansion was
the cost of equity of an unlisted company, because this was an important step in identifying whether the project
was worth it. The sales manager, Adeel, asked financial consultants for guidance, and he was directed to research
the weighted average cost of capital (WACC) and cost of equity of Hyundai’s competitors.
n
The most frequently used models for calculating cost of equity are the capital asset pricing model (CAPM)
tio
and dividend discount model (DDM). But private companies are not listed and do not have stock price, so
they have no stock returns and beta; thus, CAPM cannot be applied to them to calculate cost of equity, and
the dividend discount model is not applicable. For these reasons, this teaching note highlights the use of
lu
the pure-play method to calculate the cost of equity, and it discusses and computes the valuation of Hyundai
Nishat’s expansion plan. The cash flows are prepared for the purpose of valuation, and the concept of
So
growing in perpetuity is applied for the calculation of terminal value. Overall, the case combines the inputs
required for the valuation of a private firm using discounted cash flow (DCF) valuation.
OBJECTIVES
• Learn about the difficulties private companies encounter when assessing the cost of equity capital, and
investigate the pure-play method as a potential replacement for conventional models like the CAPM
and DDM.
• Comprehend the significance of precise valuation when choosing between different options for business
expansion.
• Evaluate the potential advantages and dangers connected with a growth plan, and study various factors that
determine the cost of equity capital for private businesses, such as comparable industries and risk concerns.
The Case Solution Starts From page 6
, e
pl
m
ASSIGNMENT QUESTIONS
1. Calculate free cash flow to the firm (FCFF) for Hyundai Nishat for the next five years based on financial
Sa
statements given in Exhibits 1 and 2 of the case.
2. What is the appropriate rate for discounting the free cash flows for Hyundai Nishat while making
expansion decisions?
3. How does the calculation of cost of capital for a private company differ from that of a public company?
n
4. Determine the unlevered and levered cost of equity for Hyundai Nishat. Calculate the cost of capital
that would be required by Hyundai to set up a new plant and expand its manufacturing capacity.
tio
5. Determine the terminal value of the expansion project after five years, assuming that the FCFF will
grow perpetually at the rate of 7 per cent, per year.
6. Calculate the value of the expansion plan for Hyundai Nishat.
lu
So
The Case Solution Starts From page 6
,ANALYSIS
1. Calculate free cash flow to the firm (FCFF) for Hyundai Nishat for the next five years based on
financial statements given in Exhibits 1 and 2 of the case.
The free cash flow to the firm should include all net after-tax cash flows except those relating to financing
activities. The free cash flow for a given year is calculated as follows:
FCFF = earnings before interest and taxes (1 − tax rate) + depreciation − increase in working capital − new
capital expenditures
FCFF for the expansion plan was estimated from projected income statements and balance sheets (see
Exhibit TN-1).
2. What is the appropriate rate for discounting the free cash flows for Hyundai Nishat while making
e
expansion decisions?
pl
m
Sa
n
tio
lu
So
The Case Solution Starts From page 6
, e
pl
m
Sa
n
tio
lu
6. Calculate the value of the expansion plan for Hyundai Nishat.
The value of the expansion plan is estimated by adding the present value of cash flows discounted at
So
WACC. Operating cash flows are estimated in Exhibit TN-1, WACC in Exhibit TN-5, and terminal cash
flow in Exhibit TN-6.
𝐶𝐹 𝐶𝐹 𝐶𝐹 𝐶𝐹 𝐶𝐹
𝑽𝒂𝒍𝒖𝒆 = + + + +
(1 + 𝑤𝑎𝑐𝑐) (1 + 𝑤𝑎𝑐𝑐) (1 + 𝑤𝑎𝑐𝑐) (1 + 𝑤𝑎𝑐𝑐) (1 + 𝑤𝑎𝑐𝑐)
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒
+
(1 + 𝑤𝑎𝑐𝑐)
7,336 9,347 12,294 14,567 17,296
𝑽𝒂𝒍𝒖𝒆 = + + + +
(1 + 0.1230) (1 + 0.1230) (1 + 0.1230) (1 + 0.1230) (1 + 0.1230)
291012.0635
+
(1 + 0.1230)
𝑽𝒂𝒍𝒖𝒆 = 6532.50 + 7411.61 + 8680.68 + 9159.06 + 9683.82 + 162934.18
𝑽𝒂𝒍𝒖𝒆 = 291012.0635
The Case Solution Starts From page 6
, EXHIBIT -1: FREE CASH FLOW TO THE FIRM FOR HYUNDAI MOTORS (US$ THOUSANDS)
Year 1 Year 2 Year 3 Year 4 Year 5
EBITDA 15,284 17,854 18,684 22,171 28,690
Depreciation at 20% 2,347 2,714 2,935 3,133 3,392
EBIT 13,951.45 17,314.01 21,418.96 26,407.59 32,473.63
EBIT(1 − tax rate) 9,905.53 12,292.95 15,207.46 18,749.39 23,056.28
Add depreciation at 20%
e
pl
m
Sa
EXHIBIT -2: CALCULATION OF UNLEVERED BETA
n
tio
lu
+
So
)
The Case Solution Starts From page 6
CASE STUDY SOLUTION
e
pl
m
SYNOPSIS
The sales manager and team of Hyundai Nishat Motor (Private) Limited (Hyundai Nishat) were discussing the
Sa
expansion of Hyundai to increase the company’s success in Pakistan. But the main issue with the expansion was
the cost of equity of an unlisted company, because this was an important step in identifying whether the project
was worth it. The sales manager, Adeel, asked financial consultants for guidance, and he was directed to research
the weighted average cost of capital (WACC) and cost of equity of Hyundai’s competitors.
n
The most frequently used models for calculating cost of equity are the capital asset pricing model (CAPM)
tio
and dividend discount model (DDM). But private companies are not listed and do not have stock price, so
they have no stock returns and beta; thus, CAPM cannot be applied to them to calculate cost of equity, and
the dividend discount model is not applicable. For these reasons, this teaching note highlights the use of
lu
the pure-play method to calculate the cost of equity, and it discusses and computes the valuation of Hyundai
Nishat’s expansion plan. The cash flows are prepared for the purpose of valuation, and the concept of
So
growing in perpetuity is applied for the calculation of terminal value. Overall, the case combines the inputs
required for the valuation of a private firm using discounted cash flow (DCF) valuation.
OBJECTIVES
• Learn about the difficulties private companies encounter when assessing the cost of equity capital, and
investigate the pure-play method as a potential replacement for conventional models like the CAPM
and DDM.
• Comprehend the significance of precise valuation when choosing between different options for business
expansion.
• Evaluate the potential advantages and dangers connected with a growth plan, and study various factors that
determine the cost of equity capital for private businesses, such as comparable industries and risk concerns.
The Case Solution Starts From page 6
, e
pl
m
ASSIGNMENT QUESTIONS
1. Calculate free cash flow to the firm (FCFF) for Hyundai Nishat for the next five years based on financial
Sa
statements given in Exhibits 1 and 2 of the case.
2. What is the appropriate rate for discounting the free cash flows for Hyundai Nishat while making
expansion decisions?
3. How does the calculation of cost of capital for a private company differ from that of a public company?
n
4. Determine the unlevered and levered cost of equity for Hyundai Nishat. Calculate the cost of capital
that would be required by Hyundai to set up a new plant and expand its manufacturing capacity.
tio
5. Determine the terminal value of the expansion project after five years, assuming that the FCFF will
grow perpetually at the rate of 7 per cent, per year.
6. Calculate the value of the expansion plan for Hyundai Nishat.
lu
So
The Case Solution Starts From page 6
,ANALYSIS
1. Calculate free cash flow to the firm (FCFF) for Hyundai Nishat for the next five years based on
financial statements given in Exhibits 1 and 2 of the case.
The free cash flow to the firm should include all net after-tax cash flows except those relating to financing
activities. The free cash flow for a given year is calculated as follows:
FCFF = earnings before interest and taxes (1 − tax rate) + depreciation − increase in working capital − new
capital expenditures
FCFF for the expansion plan was estimated from projected income statements and balance sheets (see
Exhibit TN-1).
2. What is the appropriate rate for discounting the free cash flows for Hyundai Nishat while making
e
expansion decisions?
pl
m
Sa
n
tio
lu
So
The Case Solution Starts From page 6
, e
pl
m
Sa
n
tio
lu
6. Calculate the value of the expansion plan for Hyundai Nishat.
The value of the expansion plan is estimated by adding the present value of cash flows discounted at
So
WACC. Operating cash flows are estimated in Exhibit TN-1, WACC in Exhibit TN-5, and terminal cash
flow in Exhibit TN-6.
𝐶𝐹 𝐶𝐹 𝐶𝐹 𝐶𝐹 𝐶𝐹
𝑽𝒂𝒍𝒖𝒆 = + + + +
(1 + 𝑤𝑎𝑐𝑐) (1 + 𝑤𝑎𝑐𝑐) (1 + 𝑤𝑎𝑐𝑐) (1 + 𝑤𝑎𝑐𝑐) (1 + 𝑤𝑎𝑐𝑐)
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒
+
(1 + 𝑤𝑎𝑐𝑐)
7,336 9,347 12,294 14,567 17,296
𝑽𝒂𝒍𝒖𝒆 = + + + +
(1 + 0.1230) (1 + 0.1230) (1 + 0.1230) (1 + 0.1230) (1 + 0.1230)
291012.0635
+
(1 + 0.1230)
𝑽𝒂𝒍𝒖𝒆 = 6532.50 + 7411.61 + 8680.68 + 9159.06 + 9683.82 + 162934.18
𝑽𝒂𝒍𝒖𝒆 = 291012.0635
The Case Solution Starts From page 6
, EXHIBIT -1: FREE CASH FLOW TO THE FIRM FOR HYUNDAI MOTORS (US$ THOUSANDS)
Year 1 Year 2 Year 3 Year 4 Year 5
EBITDA 15,284 17,854 18,684 22,171 28,690
Depreciation at 20% 2,347 2,714 2,935 3,133 3,392
EBIT 13,951.45 17,314.01 21,418.96 26,407.59 32,473.63
EBIT(1 − tax rate) 9,905.53 12,292.95 15,207.46 18,749.39 23,056.28
Add depreciation at 20%
e
pl
m
Sa
EXHIBIT -2: CALCULATION OF UNLEVERED BETA
n
tio
lu
+
So
)
The Case Solution Starts From page 6
