Case 003ValuationCore
You get three years of partly blank statements for a machine tool maker. Fill them in, forecast free cash flow, and value the business.
1The situation
Sukshma Precision Tools has revenue of Rs 500, 550 and 605 crore over the last three years. EBITDA margin is 18% throughout, depreciation and amortisation is Rs 20 crore a year, capex is Rs 30 crore a year, net working capital is 15% of revenue and tax is 25%. The company has no debt. At the end of year 1 it held Rs 40 crore of cash and Rs 200 crore of net plant, and it pays no dividends.
Assume revenue grows 10% a year for the next three years, with the same margin, D and A, capex and working capital ratio. WACC is 11% and terminal growth is 4%.
2Your task
Fill the missing lines in all three statements, forecast free cash flow for years 4 to 6, and value the company.
Quick check
Year 3 revenue is Rs 605 crore and net working capital is 15% of revenue. How much cash does working capital absorb in year 3?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Enterprise value is about Rs 945 crore, and equity value about Rs 1,075 crore once Rs 130 crore of cash is added. Free cash flow is Rs 41.8 crore and Rs 48.4 crore in the historical years, rising to Rs 55.8, 63.8 and 72.7 crore. The terminal value carries 84% of the value, so its inputs deserve the scrutiny.
Step 1Why fill the statements before touching the DCF?
A DCF only rearranges numbers that come from the statements. If the statements do not tie, the valuation inherits the error and nobody can find it later. The test of a filled set is that the balance sheet balances without a plug: cash must rise by exactly free cash flow and equity by exactly net income. Think of a household that tracks spending in one notebook and its bank balance in another; if the two do not agree at month end, the budget built on them is fiction.
Step 2How does each blank get filled?
Work top to bottom. EBITDA is 18% of revenue, Rs 90, 99 and 108.9 crore. Less D and A gives EBIT of Rs 70, 79 and 88.9 crore, and with no debt, tax at 25% leaves net income of Rs 52.5, 59.25 and 66.68 crore. Free cash flow is net income plus D and A, less capex, less the increase in working capital: Rs 59.25 + 20 - 30 - 7.5 = Rs 41.75 crore in year 2. Plant grows Rs 10 crore a year because capex exceeds D and A. The unlevered free cash flowCash the business generates after tax, capex and working capital, before any payment to lenders or shareholders. here equals levered cash flow only because there is no debt.
Step 3What is the business worth?
Grow revenue 10% a year and repeat the same lines. Discount each year's cash flow at 11%, then add a terminal value at the end of year 6: year 6 cash flow grown at 4%, divided by 11% less 4%, which is Rs 1,080.5 crore, worth Rs 790.1 crore today. Enterprise value is Rs 945.3 crore; add the Rs 130.2 crore of cash and equity is worth Rs 1,075.5 crore.
| Forecast | Revenue | Net income | Rise in NWC | Free cash flow | PV at 11% |
|---|---|---|---|---|---|
| Year 4 | 665.5 | 74.8 | 9.1 | 55.8 | 50.2 |
| Year 5 | 732.1 | 83.8 | 10.0 | 63.8 | 51.8 |
| Year 6 | 805.3 | 93.7 | 11.0 | 72.7 | 53.2 |
| Terminal value | 1,080.5 | 790.1 | |||
| Enterprise value | 945.3 |
Step 4What would a reviewer challenge?
Two things. Capex is held flat at Rs 30 crore while revenue grows 10% a year, which a machine tool maker cannot do for long. And the terminal year still carries working capital investment for 10% growth while the formula assumes 4%. Resetting that one line to 4% growth lifts terminal cash flow to Rs 78.9 crore and enterprise value to about Rs 1,012 crore, a 7% swing from a single cell. Say both out loud; the reviewer is checking whether you see that the terminal year must be a steady state.
Where candidates lose it
The most common error is subtracting the level of working capital rather than its change, which turns a healthy company's cash flow negative. The second is discounting the terminal value by four years instead of three: it sits at the end of year 6, three years from today in this forecast.
A third is forgetting cash. Enterprise value is not what shareholders own; the Rs 130 crore in the bank belongs to them on top.
What the interviewer asks next
- Capex grows with revenue at 5% of sales. How does enterprise value change?
- Cross-check the terminal value: what EV to EBITDA multiple does it imply?
- How would the statements change if the company had Rs 200 crore of debt at 9%?
Asked at Harris Williams, Mergers and Acquisitions, Richmond, 2026 (Wall Street Oasis): Fill in the blanks with excel for balance sheet, income statement, and scf across 3 years, then forecast fcf and derive a value
Asked at Harris Williams, Investment Banking, Richmond, 2018 (Wall Street Oasis): final was in person super day with 2-3 different rounds: one DCF model test
Company names and figures are illustrative.