financial prudence for mergercase one
TRANSCRIPT
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FINANCIAL PRUDENCE
TO MERGER/ACQUISITION
[ AMALGAMATION]
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Case No.1
The summarized Balance Sheet of A Ltd. as on 31stDecember, 2011 is as follows:-
AssetsRs.
Fixed Assets 19,00,000 Investments 1,00,000 Current Asset: Inventories 5,00,000
Debtors 4,00,0000Bank Bal. 1,00,000_______
10,00,000 ___________
30,00,000 ___________ -----------------
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Liabilities
Equity Share Capital ( 2,00,000 shares @ Rs. 10 each20,00,000
13%Preference share Capital 1,00,000 Retained Earnings 4,00,000 12%Debentures 3,00,000
Current Liabilities 2,00,000 ____________ 30,00,000
____________ ------------------
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Negotiations for takeover of A Ltd. inits acquisition by B Ltd. The considerationconsists of : Rs. 3,30,000 13% Debentures of B Ltd. for
redeeming the 12% Debentures of A Ltd.
Rs. 1,00,000 12% convertible preferenceshares in B Ltd. for the payment of thepreference share capital of A Ltd.;
1,50,000 equity shares of B Ltd. to be issuedat its current market price of 15=and
B Ltd. has also decided that it would meetdissolution related expenses of Rs. 30,000.
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The break-up figures of eventualdisposition by B Ltd. of unrequiredassets and liabilities of A Ltd. are as
follows Investments Rs. 1,25,000
Debtors Rs. 3,50,000
Inventories Rs. 4,25,000 And also payment of current
liabilities made at Rs. 1,90,000
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This Project is expected to generate yearlyoperating Cash Flow After Tax (CFAT) ofRs. 7,00,000 for 6 years. It is estimated
that fixed assets of A Ltd. would fetch Rs.3,00,000 at the end of 6th year.
The cost of capital is 15%. As aManagement Consultant, comment on the
financial prudence of the merger decisionof B Ltd.
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Solution:: A: Cost Of Mergers/Acquisition inthis case is as follows:-
I Calculation of Cost of Merger/Acquisition of ALtd. to B Ltd.
13% Debentures 3,30,000 12% Convertible Preference shares 1,00,000
New Equity Share Capital ( 1,50,000 X 15 ) 22,50,000 Dissolution Expenses regarding A Ltd. 30,000 Payments made for
current liabilities of A Ltd. 1,90,000 ________
29,00,000
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Less:- Recovery Possible from A Ltd.
From Investments 1,25,000
Debtors 3,50,000
Inventories 4,25,000
Bank Balance too 1,00,000
_________10,00,000
___________
19,00,000
___________
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Financial Viability about theMergers/Acquisition
II.Statement Reflecting the Net Present Value Status ofCash Flow
-____________________________________________________________
Year Cash Flow After Tax PVF @15%Present Value _______________________________________________
_____________ 1 to 6 7,00,000 Rs. Every year3.784 26,48,800 End of 6th Year 3,00,000 ( Residual Value For fixed Assets of A Ltd. )0.432 1,29,600
___________ 27,78,400
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Cost of Merger/Acquisition19,00,000
____________
NPV 8,78,400 ____________
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III. Comment
1. NPV is positive by Rs. 8,78,400
2. The Merger/Acquisition would bebeneficial to B Ltd.