Financial Prudence for Mergercase One

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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.