International Financial Management: Q1. Discuss The Complexities Involved in International Capital Budgeting Answer

Chapter 12 International Financial Management
Chapter 12
International Financial Management
Q1. Discuss the complexities involved in International Capital Budgeting
Answer:
Multinational Capital Budgeting has to take into consideration the different
factors and variables which affect a foreign project and are complex in nature
than domestic projects. The factors crucial in such a situation are:
1. Cash flows from foreign projects have to be converted into the currency
of the parent organization.
2. Parent cash flows are quite different from project cash flows
3. Profits remitted to the parent firm are subject to tax in the home country
as well as the host country
4. Effect of foreign exchange risk on the parent firm’s cash flow
5. Changes in rates of inflation causing a shift in the competitive
environment and thereby affecting cash flows over a specific time period
6. Restrictions imposed on cash flow distribution generated from foreign
projects by the host country
7. Initial investment in the host country to benefit from the release of
blocked funds
8. Political risk in the form of changed political events reduce the possibility
of expected cash flows
9. Concessions/benefits provided by the host country ensures the upsurge
in the profitability position of the foreign project
10.Estimation of the terminal value in multinational capital budgeting is
difficult since the buyers in the parent company have divergent views
on acquisition of the project.
Page 266 Navkar Institute

CA Final SFM
Q2. Discuss Project vis a vis Parent Cash Flows

Answer:
There exists a big difference between the project and parent cash flows due
to tax rules, exchange controls. Management and royalty payments are
returns to the parent firm.
The basis on which a project shall be evaluated depend on
1. one’s own cash flows,
2. cash flows accruing to the parent firm or
3. both.
Evaluation of a project on the basis of own cash flows

− entails that the project should compete favourably with domestic firms
and earn a return higher than the local competitors.
− If not, the shareholders and management of the parent company shall
invest in the equity/government bonds of domestic firms.
− A comparison cannot be made since foreign projects replace imports
and are not competitors with existing local firms.
− Project evaluation based on local cash flows avoid currency conversion
and eliminates problems associated with fluctuating exchange rate
changes.
For evaluation of foreign project from the parent firm’s angle,
− both operating and financial cash flows actually remitted to it form the
yardstick for the firm’s performance and the basis for distribution of
dividends to the shareholders and repayment of debt/interest to
lenders.
− An investment has to be evaluated on basis of net after tax operating
cash flows generated by the project.
− As both types of cash flows (operating and financial) are clubbed
together, it is essential to see that financial cash flows are not mixed up
with operating cash flows.

Q3. Discuss Adjusting the discount rate and cash flows in International Capital
Budgeting
Answer:
An important aspect in multinational capital budgeting is to adjust cash flows
or the discount rate for the additional risk arising from foreign location of
the project.
Earlier MNCs adjusted the discount rate upwards for riskier projects as they
considered uncertainties in political environment and foreign exchange
fluctuations. The MNCs considered adjusting the discount rate to be popular
as the rate of return of a project should be in conformity with the degree of
risk.
It is not proper to combine all risks into a single discount rate. Political
risk/uncertainties attached to a project relate to possible adverse effects
which might occur in future but cannot be foreseen at present.
− So adjusting discount rates for political risk penalises early cash flows
more than distant cash flows.
− Also adjusting discount rate to offset exchange risk only when
adverse exchange rate movements are expected is not proper since
a MNC can gain from favourable currency movements during the life
of the project on many occasions.
Instead of adjusting discount rate while considering risk it is worthwhile to
adjust cash flows.
− The annual cash flows are discounted at a rate applicable to the

project either at that of the host country or parent country.
− Probability with certainty equivalent method along with decision
tree analysis are used for economic and financial forecasting.
− Cash flows generated by the project and remitted to the parent
during each period are adjusted for political risk, exchange rate and
other uncertainties by converting them into certainty equivalents.

CA Final SFM
Q4. Write a short note on Adjusted Net Present Value

Answer:
APV is used in evaluating foreign projects. The APV model is a value additive
approach to capital budgeting process i.e. each cash flow is considered
individually and discounted at a rate consistent with risk involved in the cash
flow.
Different components of the project’s cash flow have to be discounted
separately.
The APV method uses different discount rates for different segments of the total
cash flows depending on the degree of certainty attached with each cash flow.
The financial analyst tests the basic viability of the foreign project before
accounting for all complexities. If the project is feasible no further evaluation
based on accounting for other cash flows is done. If not feasible, an additional
evaluation is done taking into consideration the other complexities.
The APV model is represented as follows
𝐀𝐏𝐕 = 𝐍𝐏𝐕 + 𝐏𝐕 𝐨𝐟 𝐓𝐚𝐱 𝐒𝐡𝐢𝐞𝐥𝐝 𝐨𝐧 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 + 𝐏𝐕 𝐨𝐟 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐒𝐮𝐛𝐬𝐢𝐝𝐢𝐞𝐬
The initial investment will be net of any ‘Blocked Funds’ that can be made use
of by the parent company for investment in the project.
− ‘Blocked Funds’ are balances held in foreign countries that cannot be

remitted to the parent due to Exchange Control regulations. These are
‘direct blocked funds’.
− Apart from this, it is quite possible that significant costs in the form of
local taxes or withholding taxes arise at the time of remittance of the
funds to the parent country. Such ‘blocked funds’ are indirect.
− If a parent company can release such ‘Blocked Funds’ in one country for
the investment in a overseas project, then such amounts will go to
reduce the ‘Cost of Investment Outlay’.
The last two terms in the above formula are discounted at the before tax cost of
debt to reflect the relative cash flows due to tax and interest savings.

Q5. What are the different scenarios involved while evaluating international
investment?
Answer:
1. Foreign company investing in India
2. An Indian Company is investing in foreign country by raising fund in the
same country
3. An Indian Company is investing in foreign country by raising fund in
different country through the mode of Global Depository Receipts (GDRs)
Q6. What are the sources for international finance?

Answer:
1. Foreign Currency Convertible Bonds
2. American Depository Receipts
3. Global Depository Receipts
4. Euro Convertible Bonds
Q7. Write short note on Foreign Currency Convertible Bonds? Also state what
are the advantages and disadvantages of it?
Answer:
✓ A type of convertible bond issued in a currency different than the issuer's
domestic currency.
✓ In other words, the money being raised by the issuing company is in the
form of a foreign currency.
✓ A convertible bond is a mix between a debt and equity instrument.
✓ It acts like a bond by making regular coupon and principal payments,
but these bonds also give the bondholder the option to convert the bond
into stock.

CA Final SFM
Advantages of FCCBs
(i) The convertible bond gives the investor the flexibility to convert the
bond into equity at a price or redeem the bond at the end of a
specified period, normally three years if the price of the share has
not met his expectations.
(ii) Companies prefer bonds as it leads to delayed dilution of equity and
allows company to avoid any current dilution in earnings per share
that a further issuance of equity would cause.
(iii) FCCBs are easily marketable as investors enjoys option of conversion
into equity if resulting to capital appreciation. Further investor is
assured of a minimum fixed interest earnings.
Disadvantages of FCCBs
(i) Exchange risk is more in FCCBs as interest on bonds would be payable
in foreign currency. Thus companies with low debt equity ratios, large
forex earnings potential only opt for FCCBs.
(ii) FCCBs mean creation of more debt and a forex outgo in terms of
interest which is in foreign exchange.
(iii) In the case of convertible bonds, the interest rate is low, say around 3–
4% but there is exchange risk on the interest payment as well as re-
payment if the bonds are not converted into equity shares. The only
major advantage would be that where the company has a high rate
of growth in earnings and the conversion takes place subsequently, the
price at which shares can be issued can be higher than the current
market price.

Q8. Write short notes on American Depository Receipts (ADRs).

Answer:
✓ Introduced to the financial markets in 1927, an American Depository
Receipt (ADR) is a stock that trades in the United States but represents
a specified number of shares in a foreign corporation. ADRs are bought
and sold on U.S. stock markets just like regular stocks and are
issued/sponsored in the U.S. by a bank or brokerage.
✓ ADRs were introduced in response to the difficulty of buying shares from
other countries which trade at different prices and currency values.
✓ U.S. banks simply purchase a large lot of shares from a foreign company,
bundle the shares into groups and reissue them on either the NYSE,
AMEX or Nasdaq.
✓ The depository bank sets the ratio of U.S. ADRs per home country share.
This ratio can be anything less than or greater than 1. For example, a ratio
of 4:1 means that one ADR share represents four shares in the foreign
company.
Advantages of Investing in ADR
✓ ADRs allow US Investor to invest in companies outside North America with
greater ease.
✓ By investing in different countries, you have the potential to capitalize on
emerging economies.
Disadvantages of Investing in ADR
✓ ADRs come with more risks, involving political factors, exchange rates and
so on.
✓ Language barriers and a lack of standards regarding financial disclosure
can make it difficult to research foreign companies.

CA Final SFM
Q9. Write short notes on Global Depository Receipts (GDRs).

Answer:
✓ A global depositary receipt (GDR) is similar to an ADR, but is a depositary
receipt sold outside of the United States and outside of the home country
of the issuing company. Most GDRs are, regardless of the geographic
market, denominated in United States dollars, although some trade in
Euros or British sterling.
✓ It is not a different financial instrument, as it may sound, from that of ADR.
In fact if the Indian Company which has issued ADRs in the American market
wishes to further extend it to other developed and advanced countries such
as Europe, then they can sell these ADRs to the public of Europe and the same
would be named as GDR.
✓ GDR can be particularly helpful to those persons who are not resident of a
country in which they want to invest. Because through GDR those persons
can invest in the shares of the company without any problem and hence it is
a great alternative of investment for them
✓ Prices of GDR are often close to values of related shares, but they are traded
and settled separately than the underlying share.
Advantages of GDR to issuing company
• Accessibility to foreign capital markets
• Rise in the capital because of foreign investors
Advantages of GDR to investor
• Helps in diversification, hence reducing risk
• More transparency since competitor’s securities can be compared

Q10. What is the impact of Global Depository Receipts (GDRs) in Indian Capital
Market
Answer:
Since the inception of GDRs a remarkable change in Indian capital market has
been observed as follows:
1. Indian stock market to some extent is shifting from Bombay to
Luxemburg.
2. There is arbitrage possibility in GDR issues.
3. Indian stock market is no longer independent from the rest of the
world. This puts additional strain on the investors as they now need
to keep updated with world wide economic events.
4. Indian retail investors are completely sidelined. GDRs/Foreign
Institutional Investors' placements + free pricing implies that retail
investors can no longer expect to make easy money on heavily
discounted rights/public issues.
As a result of introduction of GDRs a considerable foreign investment has flown
into India.
Q11. What are the characteristics of GDR

Answer:
1. Holders of GDRs participate in the economic benefits of being ordinary
shareholders, though they do not have voting rights.
2. GDRs are settled through CEDEL & Euro-clear international book entry
systems.
3. GDRs are listed on the Luxemburg stock exchange.
4. Trading takes place between professional market makers on an OTC
(over the counter) basis.
5. The instruments are freely traded.
6. They are marketed globally without being confined to borders of any
market or country as it can be traded in more than one currency.

CA Final SFM
7. Investors earn fixed income by way of dividends which are paid in

issuer currency converted into dollars by depository and paid to
investors and hence exchange risk is with investor.
8. As far as the case of liquidation of GDRs is concerned, an investor may
get the GDR cancelled any time after a cooling off period of 45 days.
A non-resident holder of GDRs may ask the overseas bank (depository)
to redeem (cancel) the GDRs In that case overseas depository bank
shall request the domestic custodians bank to cancel the GDR and to
get the corresponding underlying shares released in favour of non-
resident investor. The price of the ordinary shares of the issuing
company prevailing in the Bombay Stock Exchange or the National
Stock Exchange on the date of advice of redemption shall be taken as
the cost of acquisition of the underlying ordinary share.
Q12. Write short notes on Euro Convertible Bonds.
Answer:
✓ Euro Convertible bonds are quasi-debt securities (unsecured) which can be
converted into depository receipts or local shares.
✓ ECBs offer the investor an option to convert the bond into equity at a fixed
price after the minimum lock in period.
✓ The price of equity shares at the time of conversion will have a premium
element. The bonds carry a fixed rate of interest.
✓ These are bearer securities and generally the issue of such bonds may carry
two options viz., call option and put option.
− A call option allows the company to force conversion if the market
price of the shares exceeds a particular percentage of the
conversion price.
− A put option allows the investors to get his money back before
maturity.
✓ In the case of ECBs, the payment of interest and the redemption of the
bonds will be made by the issuer company in US dollars. ECBs issues are
listed at London or Luxemburg stock exchanges.

✓ Indian companies which have opted ECBs issue are Jindal Strips, Reliance,
Essar Gujarat, Sterlite etc.
✓ Indian companies are increasingly looking at Euro-Convertible bond in place
of Global Depository Receipts because GDRs are falling into disfavor among
international fund managers.
✓ An issuing company desirous of raising the ECBs is required to obtain prior
permission of the Department of Economic Affairs, Ministry of Finance, and
Government of India.
✓ The proceeds of ECBs would be permitted only for following purposes:
(i) Import of capital goods.
(ii) Retiring foreign currency debts.
(iii) Capitalizing Indian joint venture abroad.
Q13. Discuss other sources of International Finance

Answer:
1. Euro Bonds: Plain Euro-bonds are nothing but debt instruments. These
are not very attractive for an investor who desires to have valuable
additions to his investments.
2. Euro-Convertible Zero Bonds: These bonds are structured as a
convertible bond. No interest is payable on the bonds. But conversion of
bonds takes place on maturity at a pre- determined price. Usually there is
a 5 years maturity period and they are treated as a deferred equity issue.
3. Euro-bonds with Equity Warrants: These bonds carry a coupon rate
determined by the market rates. The warrants are detachable. Pure bonds
are traded at a discount. Fixed income funds' managements may like to
invest for the purposes of regular income.
4. Syndicated bank loans: One of the earlier ways of raising funds in the
form of large loans from banks with good credit rating, can be arranged
in reasonably short time and with few formalities. The maturity of the
loan can be for a duration of 5 to 10 years. The interest rate is generally
set with reference to an index, say, LIBOR plus a spread which depends

CA Final SFM
upon the credit rating of the borrower. Some covenants are laid down by
the lending institution like maintenance of key financial ratios.
5. Euro-bonds: These are basically debt instruments denominated in a
currency issued outside the country of that currency for examples Yen
bond floated in France. Primary attraction of these bonds is the refuge
from tax and regulations and provide scope for arbitraging yields.
6. These are usually bearer bonds and can take the form of
a. Traditional fixed rate bonds.
b. Floating rate Notes.(FRNs)
c. Convertible Bonds.
7. Foreign Bonds: Foreign bonds are denominated in a currency which is
foreign to the borrower and sold at the country of that currency. Such
bonds are always subject to the restrictions and are placed by that country
on the foreigners funds.
8. Euro Commercial Papers: These are short term money market securities
usually issued at a discount, for maturities less than one year.
9. Credit Instruments: The foregoing discussion relating to foreign exchange
risk management and international capital market shows that foreign
exchange operations of banks consist primarily of purchase and sale of
credit instruments. There are many types of credit instruments used in
effecting foreign remittances. They differ in the speed, with which money
can be received by the creditor at the other end after it has been paid in by
the debtor at his end. The price or the rate of each instrument, therefore,
varies with extent of the loss of interest and risk of loss involved. There are,
therefore, different rates of exchange applicable to different types of credit
instruments.

Q14. Discuss the complexities involved in International Working Capital

Management
Answer:
The management of working capital in an international firm is much more complex
as compared to a domestic one. The reasons for such complexity are:
✓ A multinational firm has a wider option for financing its current assets. A
MNC has funds flowing in from different parts of international financial
markets. Therefore, it may choose to avail financing either locally or from
global financial markets. Such an opportunity does not exist for pure
domestic firms.
✓ Interest and tax rates vary from one country to the other. A Treasurer
associated with a multinational firm has to consider the interest/ tax rate
differentials while financing current assets. This is not the case for domestic
firms.
✓ A multinational firm is confronted with foreign exchange risk due to the
value of inflow/outflow of funds as well as the value of import/export are
influenced by exchange rate variations. Restrictions imposed by the home
or host country government towards movement of cash and inventory
on account of political considerations affect the growth of MNCs. Domestic
firm limit their operations within the country and do not face such
problems.
✓ With limited knowledge of the politico-economic conditions prevailing in
different host countries, a Manager of a multinational firm often finds it
difficult to manage working capital of different units of the firm operating
in these countries. The pace of development taking place in the
communication system has to some extent eased this problem.

CA Final SFM
Q15. What are the main objectives of International Cash Management?

Answer:
The main objectives of an effective system of international cash management are:
(1) To minimize currency exposure risk
(2) To minimize overall cash requirements of the company as a whole
without disturbing smooth operations of the subsidiary or its affiliate
(3) To minimize transaction costs
(4) To minimize country’s political risk
(5) To take advantage of economies of scale as well as reap benefits of
superior knowledge
Q16. How the centralized cash management helps MNCs?

Answer:
A centralised cash system helps MNCs as follows:
(1) To maintain minimum cash balance during the year
(2) To manage judiciously liquidity requirements of the centre
(3) To optimally use various hedging strategies so that MNC’s foreign
exchange exposure is minimized
(4) To aid the centre to generate maximum returns by investing all cash
resources optimally
(5) To aid the centre to take advantage of multinational netting so that
transaction costs and currency exposure are minimized
(6) To make maximum utilization of transfer pricing mechanism so that the
firm enhances its profitability and growth
(7) To exploit currency movement correlations:
a) Payables & receivables in different currencies having positive
correlations
b) Payables of different currencies having negative correlations
c) Pooling of funds allows for reduced holding – the variance of the
total cash flows for the entire group will be smaller than the sum of
the individual variances.

Q17. Discuss the investment of excess cash or surplus by MNCs?

Answer:
✓ Through a centralized cash management strategy, MNCs pool together
excess funds from subsidiaries enabling them to earn higher returns due
to the larger deposits lying with them.
✓ Sometimes a separate investment account is maintained for all
subsidiaries so that short term financing needs of one can be met by the
other subsidiary without incurring transaction costs charged by banks for
exchanging currencies. Such an approach leads to an excessive
transaction costs.
✓ The centralized system helps to convert the excess funds pooled together
into a single currency for investments thereby involving considerable
transaction cost and a cost benefit analysis should be made to find out
whether the benefits reaped are not offset by the transaction costs
incurred.
✓ A question may arise as to how MNCs will utilise their excess funds once
they have used them to meet short term financing needs. This is vital since
some currencies may provide a higher interest rate or may appreciate
considerably. So deposits made in such currencies will be attractive.
✓ Again MNCs may go in for foreign currency deposit which may give an
effective yield higher than domestic deposit so as to overcome exchange
rate risk. Forecasting of exchange rate fluctuations need to be calculated
in this respect so that a comparative study can be effectively made.
✓ Lastly an MNC can go for a diversification of its portfolio in different
countries having different currencies because of the exchange rate
fluctuations taking place and at the same time avoid the possibility of
incurring substantial losses that may arise due to sudden currency
depreciation.

CA Final SFM
Q18. Write a short note on International Inventory Management? Or What do

you mean by Stock Piling?
Answer:
✓ An international firm possesses normally a bigger stock than EOQ and this
process is known as stock piling. The different units of a firm get a large
part of their inventory from sister units in different countries. This is
possible in a vertical set up.
✓ For political disturbance there will be bottlenecks in import. If the
currency of the importing country depreciates, imports will be costlier
thereby giving rise to stock piling.
✓ To take a decision against stock piling the firm has to weigh the cumulative
carrying cost vis-à-vis expected increase in the price of input due to
changes in exchange rate. If the probability of interruption in supply is
very high, the firm may opt for stock piling even if it is not justified on
account of higher cost.
✓ Also in case of global firms, lead time is larger on various units as they are
located far off in different parts of the globe. Even if they reach the port
in time, a lot of customs formalities have to be carried out. Due to these
factors, re-order point for international firm lies much earlier.
✓ The final decision depends on the quantity of goods to be imported and
how much of them are locally available. Relying on imports varies from
unit to unit but it is very much large for a vertical set up.

Q19. Write a short note on International Receivables Management?

Answer:
Credit Sales lead to the emergence of account receivables. There are two types
of such sales viz. Inter firm Sales and Intra firm Sales in the global aspect.
In case of Inter firm Sales,
− the currency in which the transaction should be denominated and the

terms of payment need proper attention.
− With regard to currency denomination, the exporter is interested to
denominate the transaction in a strong currency while the importer wants
to get it denominated in weak currency.
− The exporter may be willing to invoice the transaction in the weak
currency even for a long period if it has debt in that currency. This is due
to sale proceeds being used to retire debts without loss on account of
exchange rate changes.
− With regard to terms of payment, the exporter does not provide a longer
period of credit and ventures to get the export proceeds quickly in order
to invoice the transaction in a weak currency.
− If the credit term is liberal the exporter is able to borrow currency from
the bank on the basis of bills receivables. Also credit terms may be liberal
in cases where competition in the market is keen compelling the exporter
to finance a part of the importer’s inventory. Such an action from the
exporter helps to expand sales in a big way.
In case of Intra firm sales,
− the focus is on global allocation of firm’s resources. Different parts of the

same product are produced in different units established in different
countries and exported to the assembly units leading to a large size of
receivables.
− The question of quick or delayed payment does not affect the firm as
both the seller and the buyer are from the same firm though the one
having cash surplus will make early payments while the other having cash
crunch will make late payments.
− This is a case of intra firm allocation of resources where leads and lags
explained earlier will be taken recourse to.

CA Final SFM
Practical Questions
1. L.B, Inc., is considering a new plant in the Netherlands the plant will cost 26
Million Euros. Incremental cash flows are expected to be 3 Million Euros per
year for the first 3 years, 4 Million Euros the next three, 5 Million Euros in
year 7 through 9, and 6 Million Euros in years 10 through 19, after which the
project will terminate with no residual value. The present exchange rate is 1.90
Euros per $. The required rate of return on repatriated $ is 16%.
a. If the exchange rate stays at 1.90, what is the project’s net present value?
b. If the Euro appreciates to 1.84 for years 1-3, to 1.78 for years 4-6, to 1.72
for years 7-9, and to 1.65 for years 10-19, what happens to the net present
value?
2. ABC Ltd. is considering a project in US, which will involve an initial

investment of US $11,000,000. The project will have 5 years of life. Current
spot exchange rate is `48 per US $. The risk free rate in US is 8% and the
same in India is 12% Cash inflow from the project are as follows:
Year Cash Inflow

1 $ 2,000,000
2 $ 2,500,000
3 $ 3,000,000
4 $ 4,000,000
5 $ 5,000,000
Calculate NPV of the project using foreign currency approach. Required rate
of return on this project is 14%.
--------------------------------[Nov 2006, 5 Marks] -----------------------------------

3. XY Limited is engaged in retail business in India. It is contemplating for

expansion into a country of Africa by acquiring a group of stores having the
same line of operation as that of India.
The exchange rate for the currency of the proposed African country is
extremely volatile. Rate of inflation is presently 40% a year. Inflation in India
is currently 10% a year. Management of XY Limited expects these rates likely
to continue for the foreseeable future.
Estimated projected cash flows in real terms, in India as well as African

Country for the first three years of the project are as follows:
Year 0 1 2 3
Cash flows in Indian `(000) -50,000 -1,500 -2,000 -2,500
Cash flows in African Rands (000) -2,00,000 +50,000 +70,000 +90,000
XY Ltd. Assumes the year 3 nominal cash flows will continue to be earned
each year indefinitely. It evaluates all investments using nominal cash flows
and a nominal discounting rate. The present exchange rate is African Rand 6
to `1. You are required to calculate the net present value of the proposed
investment considering the following:
(i) African Rand cash flows are converted into rupees and discounted at a
risk adjusted rate.
(ii) All cash flows for these projects will be discounted at a rate of 20% to
reflect its high risk.
(iii) Ignore Taxation.
Year 1 2 3
PVIF @ 20% 0.833 0.694 0.579
------------------------------[May 2013, 10 Marks] --------------------------------

CA Final SFM
4. A multinational company is planning to set up a subsidiary company in India

(where hitherto it was exporting) in view of growing demand for its product
and competition from other MNCs. The initial project cost (consisting of Plant
and Machinery including installation) is estimated to be US$ 500 million. The
net working capital requirements are estimated at US$ 50 million. The
company follows straight line method of depreciation. Presently, the company
is exporting two million units every year at a unit price of US$ 80, its variable
cost per unit being US$ 40.
The Chief Financial Officer has estimated the following operating cost and
other data in respect of proposed project:
(i) Variable operating cost will be US $20 per unit of production;
(ii) Additional cash fixed cost will be US $30 million p.a. and project's
share of allocated fixed cost will be US $3 million p.a. based on
principle of ability to share;
(iii) Production capacity of the proposed project in India will be 5
million units;
(iv) Expected useful life of the proposed plant is five years with no
salvage value;
(v) Existing working capital investment for production & sale of two
million units through exports was US $15 million;
(vi) Export of the product in the coming year will decrease to 1.5
million units in case the company does not open subsidiary
company in India, in view of the presence of competing MNCs that
are in the process of setting up their subsidiaries in India;
(vii) Applicable Corporate Income Tax rate is 35%, and
(viii) Required rate of return for such project is 12%.
ADVICE X Inc. to establish the proposed project in India.

Note: 1. there will be no variation in the exchange rate of two currencies and
all profits will be repatriated, as there will be no withholding tax.
Present Value Interest Factors (PVIF) @ 12% for five years are as below:
Year 1 2 3 4 5
PVIF 0.8929 0.7972 0.7118 0.6355 0.5674
5. Perfect Inc., a U.S. based Pharmaceutical Company has received an offer from
Aidscure Ltd., a company engaged in manufacturing of drugs to cure Dengue,
to set up a manufacturing unit in Baddi (H.P.), India in a joint venture.
As per the Joint Venture agreement, Perfect Inc. will receive 55% share of
revenues plus a royalty @ US $0.01 per bottle. The initial investment will be
`200 crores for machinery and factory. The scrap value of machinery and
factory is estimated at the end of five (5) year to be `5 crores. The machinery
is depreciable @ 20% on the value net of salvage value using Straight Line
Method. An initial working capital to the tune of `50 crores shall be required
and thereafter `5 crores each year.
As per GOI directions, it is estimated that the price per bottle will be `7.50
and production will be 24 crores bottles per year. The price in addition to
inflation of respective years shall be increased by `1 each year. The
production cost shall be 40% of the revenues.
The applicable tax rate in India is 30% and 35% in US and there is Double
Taxation Avoidance Agreement between India and US. According to the
agreement tax credit shall be given in US for the tax paid in India. In both the
countries, taxes shall be paid in the following year in which profit have arisen.
The Spot rate of $ is `57. The inflation in India is 6% (expected to decrease by

0.50% every year) and 5% in US.

CA Final SFM
As per the policy of GOI, only 50% of the share can be remitted in the year
in which they are earned and remaining in the following year.
Though WACC of Perfect Inc. is 13% but due to risky nature of the project it
expects a return of 15%.
Determine whether Perfect Inc. should invest in the project or not (from
subsidiary point of view).
6. Its Entertainment Ltd., an Indian Amusement Company is happy with the

success of its Water Park in India. The company wants to repeat its success
in Nepal also where it is planning to establish a Grand Water Park with world
class amenities. The company is also encouraged by a marketing research
report on which it has just spent `20,00,000 lacs.
The estimated cost of construction would be Nepali Rupee (NPR) 450 crores
and it would be completed in one years time. Half of the construction cost
will be paid in the beginning and rest at the end of year. In addition, working
capital requirement would be NPR 65 crores from the year end one. The
after tax realizable value of fixed assets after four years of operation is
expected to be NPR 250 crores. Under the Foreign Capital Encouragement
Policy of Nepal, company is allowed to claim 20% depreciation allowance
per year on reducing balance basis subject to maximum capital limit of NPR
200 crore. The company can raise loan for theme park in Nepal @ 9%.
The water park will have a maximum capacity of 20,000 visitors per day. On
an average, it is expected to achieve 70% capacity for first operational four
years. The entry ticket is expected to be NPR 220 per person. In addition to
entry tickets revenue, the company could earn revenue from sale of food
and beverages and fancy gift items. The average sales expected to be NPR
150 per visitor for food and beverages and NPR 50 per visitor for fancy gift

items. The sales margin on food and beverages and fancy gift items is 20%
and 50% respectively. The park would open for 360 days a year.
The annual staffing cost would be NPR 65 crores per annum. The annual
insurance cost would be NPR 5 crores. The other running and maintenance
costs are expected to be NPR 25 crores in the first year of operation which
is expected to increase NPR 4 crores every year. The company would
apportion existing overheads to the tune of NPR 5 crores to the park.
All costs and receipts (excluding construction costs, assets realizable value
and other running and maintenance costs) mentioned above are at current
prices (i.e. 0 point of time) which are expected to increase by 5% per year.
The current spot rate is NPR 1.60 per `. The tax rate in India is 30% and in
Nepal it is 20%.
The current WACC of the company is 12%. The average market return is 11%
and interest rate on treasury bond is 8%. The company’s current equity beta
is 0.45. The company’s funding ratio for the Water Park would be 55%
equity and 45% debt.
Being a tourist Place, the amusement industry in Nepal is competitive and

very different from its Indian counterpart. The company has gathered the
relevant information about its nearest competitor in Nepal. The
competitor’s market value of the equity is NPR 1850 crores and the debt
is NPR 510 crores and the equity beta is 1.35.
State whether Its Entertainment Ltd. should undertake Water Park project in
Nepal or not.

CA Final SFM
7. Opus Technologies Ltd., an Indian IT company is planning to make an

investment through a wholly owned subsidiary in a software project in China
with a shelf life of two years. The inflation in China is estimated as 8 percent.
Operating cash flows are received at the year end.
For the project an initial investment of Chinese Yuan (CN¥) 30,00,000 will be
in land. The land will be sold after the completion of project at estimated
value of CN¥ 35,00,000. The project also requires an office complex at cost
of CN¥ 15,00,000 payable at the beginning of project. The complex will be
depreciated on straight-line basis over two years to a zero salvage value. This
complex is expected to fetch CN¥ 5,00,000 at the end of project.
The company is planning to raise the required funds through GDR issue in
Mauritius. Each GDR will have 5 common equity shares of the company as
underlying security which are currently trading at `200 per share (Face
Value = `10) in the domestic market. The company has currently paid the
dividend of 25% which is expected to grow at 10% p.a. The total issue cost is
estimated to be 1 percent of issue size.
The annual sales is expected to be 10,000 units at the rate of CN¥ 500 per unit.
The price of unit is expected to rise at the rate of inflation. Variable operating
costs are 40 percent of sales. Fixed operating costs will be CN¥ 22,00,000 per
year and expected to rise at the rate of inflation.
The tax rate applicable in China for income and capital gain is 25 percent and
as per GOI Policy no further tax shall be payable in India. The current spot
rate of CN¥ 1 is `9.50. The nominal interest rate in India and China is 12%
and 10% respectively and the international parity conditions hold

You are required to
a) Identify expected future cash flows in China and determine NPV of the
project in CN¥.
b) Determine whether Opus Technologies should go for the project or not

assuming that there neither there is restriction on the transfer of funds from
China to India nor any charges/taxes payable on the transfer of funds.
8. X Ltd. is interested in expanding its operation and planning to install

manufacturing plant at US. For the proposed project it requires a fund of $
10 million (net of issue expenses/ floatation cost). The estimated floatation
cost is 2%. To finance this project it proposes to issue GDRs.
You as financial consultant is required to compute the number of GDRs to be

issued and cost of the GDR with the help of following additional information.
(i) Expected market price of share at the time of issue of GDR is `250
(Face Value `100)
(ii) 2 Shares shall underly each GDR and shall be priced at 10%
discount to market price.
(iii) Expected exchange rate `60/$.
(iv) Dividend expected to be paid is 20% with growth rate 12%.

Chapter 13 Corporate Valuation
Chapter 13
Corporate Valuation
Q1. What is the need for the proper assessment of an enterprises value?
Answer:
1) Information for its internal stakeholders,
2) Comparison with similar enterprises for understanding management efficiency,
3) Future public listing of the enterprise,
4) Strategic planning, for e.g. finding out the value driver of the enterprise, or for a
correct deployment of surplus cash,
5) Ball park price (i.e. an approximate price) for acquisition, etc.
Q2. What are the important terms associated with valuation?
Answer:
1. The concept of present As we know that a receipt of Rs.1,000 twelve months

value of cash flows hence would not be the same as of today, because of
concept of Time Value of Money. Accordingly the
discounted value of Rs. 1,000 a year at the rate of 10%
shall be Rs. 909 approximately.
2. The concept of Internal▪ IRR is the discount rate that will equate the net present
Rate of Return (IRR) value (NPV) of all cash flows from a particular
investment or project to zero. We can also visualize IRR
as an interest rate that will get the NPVs to equal to the
investment – the higher the IRR of a project, the more
likely it gets selected for further investments.
3. Return on Investment ▪ Simply put, ROI is the return over the investment made
in an entity from a stakeholder point of view. A simple
example would be where the stakeholder has sold
shares valued at 1400, invested initially at 1000; the ROI
would be the return divided by the investment cost,
which would be (1400-1000)/1000 = 40% in this case.

CA Final SFM
You would have noted that the 40% is the return on

cash investment for this standalone transaction
4. Perpetual Growth Rate▪ As discussed earlier Gordon’s model assumes a

perpetual growth in dividend; thereby a potential
investor eyeing stable inflows will take the latest
Dividend payout and factor it with his expected rate of
return. However, this model is not widely used by
potential investors for one - there are more parameters
which need to be factored in, and secondly, dividends
rarely grow perpetually at a steady rate. However, this
model is the darling of academicians as it can neatly fit
into a ‘constant rate’ model for deliberation purposes.
5. Terminal Value ▪ Terminal’ refers to the ‘end’ of something – in the

valuation world, to ‘terminate’ would be to exit out of a
particular investment or line of business. So, when an
investor decides to pull out and book profits, he would
not only be expecting a fair value of the value created,
but also would definitely look to the ‘horizon’ and
evaluate the future cash flows, to incorporate them into
his ‘selling price’. Hence, terminal value (TV) is also
referred to as the ‘horizon’ value that the investor will
forecast for valuing his investment at the exit point.
Mostly TV is estimated using a perpetual growth model
as per the Gordon model. We will see the practical
usage of TV in the illustrations in the chapters that
follow
Q3. What methods are used in the Corporate Valuation?

Answer:
There are four approaches to valuing an enterprise:
a) Assets Based Valuation Model
b) Earning Based Models
c) Enterprise Value Model
d) Cash Flow Based Models

Q4. Write short note on Asset Based Corporate Valuation

Answer:
This approach is the standard asset value based approach where the starting point is
the latest set of financial statements.
Book Value = Total Assets minus Long Term Debt
Total Assets = Fixed Assets + Intangible Assets + Current Assets – Current Liabilities
This can also be equated to share capital plus free reserves.
However, the book value approach will not essentially represent the true price of the
assets because:
a. Tangible assets may be undervalued or even overvalued
b. Intangible assets may no longer be of actual saleable worth in the market
c. Long term debt may have a terminal payout that needs to be catered to
So, in reality, the book value is always adjusted to such factors to assess the ‘net
realizable value’ of the assets and hence is called as the ‘Adjusted Book Value’
approach.
Q5. Write Short note on Income Based Corporate Valuation
Answer:
This approach looks to overcome the drawbacks of using the asset-backed valuation
approach by referring to the earning potential and using a multiplier - ‘capitalization
rate’.
Earnings can best be depicted by EBITDA (Earnings before interest, taxes, depreciation
and amortization), and capitalization rate will be computed either using the CAPM
model discussed later in this chapter, or as multiples approach.
EAT
Value of the Equity =
Ke
or
EBITDA
Value of the Company =
Ko
Where,
Ke = Cost of Equity , Ko= Cost of Capital

CA Final SFM
Q6. Write Short note on Enterprise Value Model for Corporate Valuation
Answer:
EV = Market value of common stock + Market value of preferred equity + Market
value of debt + Minority interest - Cash and investments.
✓ The Enterprise Value, or EV for short, is a measure of a company's total value,
often used as a more comprehensive alternative to equity market
capitalization.
✓ Enterprise value is calculated as the market capitalization plus debt, minority
interest and preferred shares, minus total cash and cash equivalents.
✓ Enterprise value (EV) can be thought of as the theoretical takeover price if a

company were to be bought.
✓ EV differs significantly from simple market capitalization in several ways, and
many consider it to be a more accurate representation of a firm's value.
✓ The value of a firm's debt, for example, would need to be paid off by the buyer
when taking over a company, thus, enterprise value provides a much more
accurate takeover valuation because it includes debt in its value calculation.
✓ Why doesn't market capitalization properly represent a firm's value? It leaves
a lot of important factors out, such as a company's debt on the one hand and
its cash reserves on the other.
✓ Enterprise value is basically a modification of market cap, as it incorporates
debt and cash for determining a company's valuation.
Q7. Write Short note on Cash Flow Based Model of Corporate Valuation
Answer:
✓ As opposed to the asset based and income based approaches, the cash flow
approach takes into account the quantum of free cash that is available in future
periods, and discounting the same appropriately to match to the flow’s risk.
✓ Variant of this approach in context of equity has been discussed earlier in the
chapter of Security Valuation.
✓ Simply speaking, if the present value arrived post application of the discount rate
is more than the current cost of investment, the valuation of the enterprise is

attractive to both stakeholders as well as externally interested parties (like stock

analysts).
✓ It attempts to overcome the problem of over-reliance on historical data as seen
in both the previous methods. There are essentially five steps in performing DCF
based valuation:
1. Arriving at the ‘Free Cash Flow’
2. Forecasting of future cash flows (also called projected future cash flows)
3. Determining the discount rate based on the cost of capital
4. Finding out the Terminal Value (TV) of the enterprise
5. Finding out the present values of both the free cash flows and the TV, and
interpretation of the results.
Q8. What are the methods to measure the Cost of Equity?
Answer:
1. Capital Asset Pricing Model
2. Arbitrage Pricing Theory
[Please refer Portfolio Management Chapter for detailed explanation and
formula]
Q9. Write a short note on Geared and Ungeared Beta
Answer:
Firms must provide a return to compensate for the risk faced by investors, and even
for a well-diversified investor, this systematic risk will have two causes:
1. the risk resulting from its business activities

2. the finance risk caused by its level of gearing.
Consider therefore two firms A and B:

Both are identical in all respects including their business operations but
A has higher gearing than B:
• A would need to pay out higher returns

CA Final SFM
• any beta extrapolated from A's returns will reflect the systematic risk of both
its business and its financial position and would therefore be higher than B's.
Therefore there are two types of beta:
βAsset reflects purely the systematic risk of the business area

βEquity reflects the systematic risk of the business area and the company-specific
financial structure.
Formula
Logically βAsset is the weighted average of the equity beta and debt beta.
E D
βa = βe ( ) + βd ( )
E + D(1 − t) E + D (1 − t)
However in many situations, βd will be assumed to be zero. This means that the asset
beta formula can be simplified to
E
βa = βe ( )
E + D(1 − t)

βa
= βe
E
( )
E + D (1 − t)
E + D (1 − t)
βe = βa x ( )
E
E D (1 − t)
βe = βa x ( + )
E E
𝐃
𝛃𝐞 = 𝛃𝐚 𝐱 (𝟏 + (𝟏 − 𝐭) )
𝐄
βe = Equity Beta = Levered Beta = βL
βa = Asset Beta = Unlevered Beta = βU
𝐃
𝛃𝐋 = 𝛃𝐔 𝐱 (𝟏 + (𝟏 − 𝐭) )
𝐄
Q10. Explain the concept of “Relative Valuation”

Answer:
The Relative valuation, also referred to as ‘Valuation by multiples,’ uses financial ratios
to derive at the desired metric (referred to as the ‘multiple’) and then compares the
same to that of comparable firms. (Comparable firms would mean the ones having
similar asset and risk dispositions, and assumed to continue to do so over the
comparison period).
In the process, there may be extrapolations set to the desired range to achieve the
target set. To elaborate –
1. Find out the ‘drivers’ that will be the best representative for deriving at the
multiple. Thereby, one can have two sets of multiple based approaches
depending on the tilt of the drivers –
✓ Enterprise value based multiples, which would consist primarily of

EV/EBITDA, EV/Invested Capital, and EV/Sales.
✓ Equity value based multiples, which would comprise of P/E ratio and PEG.

CA Final SFM
2. Determine the results based on the chosen driver(s) through financial ratios
✓ Choosing the right financial ratio is a vital part of success of this model.
✓ A factor based approach may help in getting this correct – for example – a
firm that generates revenue mostly by exports will be highly influenced by
future foreign exchange fluctuations.
✓ A pure P/E based ratio may not be reflective of this reality, which couldn’t
pre-empt the impacts that Brexit triggered on currency values.
✓ Likewise, an EV/Invested Capital would be a misfit for a company which may

be light on core assets, or if has significant investment properties.
3. Find out the comparable firms, and perform the comparative analysis, and
✓ Arriving at the right mix of comparable firms: This is perhaps the most
challenging of all the steps – No two entities can be same – even if they may
seem to be operating within the same risk and opportunity perimeter.
✓ So, a software company ‘X’ that we are now comparing to a similar sized
company ‘Y’ may have a similar capital structure, a similar operative
environment, and head count size– so far the two firms are on even
platform for returns forecast and beta values.
✓ On careful scrutiny, it is now realized that the revenue generators are

different – X may be deriving its revenues from dedicated service contracts
having FTE pricing, whereas Y earns thru UTP pricing model.
✓ This additional set of information dramatically changes the risk structure –

and this is precisely what the discerning investor has to watch for. In other
words, take benchmarks with a pinch of salt.
✓ The comparable firm can either be from a peer group operating within the
same risks and opportunities perimeter, or alternatively can be just take
closely relevant firms and then perform a regression to arrive at the
comparable metrics.
4. Iterate the value of the firm obtained to smoothen out the deviations
✓ It means find out the deviations if any in valuation and make changes to
recalculate the value of the firm

Q11. Write short note Economic Value Added

Answer:
✓ The core concept behind EVA is that a company generates ‘value’ only if there
is a creation of wealth in terms of returns in excess of its cost of capital invested.
✓ So if a company's EVA is negative, it means the company is not generating value
from the funds invested into the business. Conversely, a positive EVA shows a
company is producing value from the funds invested in it.
EVA = NOPAT – (Invested Capital * WACC)
OR
EVA= NOPAT – Capital Charge
✓ The concept NOPAT (net operating profit after tax) is nothing but EBIT plus tax
expense.
✓ The logic is that we are trying to find out the cash returns that business
operations would make after tax payments.
✓ Note that we have left depreciation untouched here – it being an operational
expense for the limited purposes of EVA.
✓ From this NOPAT we need to further identify the non-cash expenses and adjust
for the same to arrive at the ‘actual’ cash earnings. One common non-cash
adjustment would ‘provision for bad and doubtful debts’, as this would just be
a book entry.
Q12. Write short note Market Value Added

Answer:
✓ The ‘MVA’ (Market Value Added) would simply be the current market value of
the firm subtracted by the invested capital that we obtained above.
✓ Let the Book value according to the balance sheet is Rs.920 and shares are
traded at Rs. 10 with 100 shares outstanding. Then Market Value Added will be
MVA= Market Value – Book Value = (100x10)-920= 80
✓ The MVA is also an alternative way to gauge performance efficiencies of an
enterprise, albeit from a market capitalization point of view, the logic being that
the market will discount the efforts taken by the management fairly.
✓ Hence, the MVA of 80 arrived in example above is the true value added that is
perceived by the market. In contrast, EVA is a derived value added that is for
the more discerning investor.

CA Final SFM
✓ Companies with a higher MVA will naturally become the darlings of the share
market, and would eventually become ‘pricey’ from a pure pricing perspective.
✓ In such cases, the EVA may also sometimes have a slightly negative correlation
as compared to MVA. But this will be a short term phenomenon as eventually
the gap will get closed by investors themselves. A stock going ex-dividend will
exhibit such propensities.
Q13. Write short note Shareholders Value Analysis

Answer:
We understand that the EVA is the residual that remains if the ‘capital charge’ is
subtracted from the NOPAT. The ‘residual’ if positive simply states that the profits
earned are adequate to cover the cost of capital.
However, is NOPAT the only factor that affects shareholder’s wealth? The answer
is not a strict ‘no’, but definitely it is ‘inadequate’, as it doesn’t take future earnings
and cash flows into account. In other words, NOPAT is a historical figure, albeit a
good one though, but cannot fully represent for the future potencies of the entity.
More importantly, it doesn’t capture the future investment opportunities (or the
opportunity costs, whichever way you look). SVA looks to plug in this gap by
tweaking the value analysis to take into its forage certain ‘drivers’ that can expand
the horizon of value creation. The key drivers considered are of ‘earnings potential
in terms of sales, investment opportunities, and cost of incremental capital.
The following are the steps involved in SVA computation:
a. Arrive at the Future Cash Flows (FCFs) by using a judicious mix of the ‘value
drivers’
b. Discount these FCFs using the WACC
c. Add the terminal value to the present values computed in step (b)
d. Add the market value of non-core assets
e. Reduce the value of debt from the result in step (d) to arrive at value of
equity.

Case Study 1
The application of ‘valuation’ in the context of the merger of Vodafone with Idea
Cellular Ltd:
The valuation methods deployed by the appointed CA firms for the merger were as follows:
a) Market Value method: The share price observed on NSE (National Stock Exchange) for
a suitable time frame has been considered to arrive at the valuation.
b) Comparable companies’ market multiple method: The stock market valuations of
comparable companies on the BSE and NSE were taken into account.
c) NAV method: The asset based approach was undertaken to arrive at the net asset value
of the merging entities as of 31st December 2016.
Surprisingly, the DCF method was not used for valuation purposes. The reason stated was that the
managements to both Vodafone and Idea had not provided the projected (future) cash flows and
other parameters necessary for performing a DCF based valuation.
The final valuation done using methods a to c gave a basis to form a merger based on the ‘Share
Exchange’ method.
Above information extracted from: ‘Valuation report’ filed by Idea Cellular with NSE
However, let’s see how the markets have reacted to this news – the following article published in
The Hindu Business Line dated 20th March 2017 will give a fair idea of the same:
“Idea Cellular slumped 9.6 per cent as traders said the implied deal price in a planned merger with
Vodafone PLC's Indian operations under-valued the company shares.Although traders had initially
reacted positively to the news, doubts about Idea's valuations after the merger sent shares
downward.
Idea Cellular Ltd fell as much as 14.57 per cent, reversing earlier gains of 14.25 per cent, after the
telecom services provider said it would merge with Vodafone Plc's Indian operations.”
Hence, we can conclude that the valuation methods, though technically correct, may not elicit a
positive impact amongst stockholders. That is because there is something called as ‘perceived
value’ that’s not quantifiable. It depends upon a majority of factors like analyst interpretations,
majority opinion etc.

CA Final SFM
Case Study 2
Valuation model for the acquisition of ‘WhatsApp’ by Facebook
Facebook announced the takeover of WhatsApp for a staggering 21.8 billion USD in 2015. The key
characteristics of WhatsApp that influenced the deal were –
a) It is a free text-messaging service and with a $1 per year service fee, had 450 million users
worldwide close to the valuation date.
b) 70% of the above users were active users.
c) An aggressive rate of user account increase of 1 million users a day would lead to pipeline
of 1 billion users just within a year’s range.
The gross per-user value would thus, come to an average of USD 55, which included a 4 billion
payout as a sweetener for retaining WhatsApp employees post takeover. The payback for
Facebook will be eventually to monetize this huge user base with recalibrated charges on
international messaging arena. Facebook believes that the future lies in international, cross-
platform communications.

Practical Questions
1. H Ltd. agrees to buy over the business of B Ltd. effective 1st April, 2012.The
summarized Balance Sheets of H Ltd. and B Ltd. as on 31st March 2012 are as
follows:
Balance Sheet as at 31st March 2012 (In Crores of Rupees)
Liabilities H Ltd. B Ltd.

Paid up share capital
-Equity Shares of `100 each 350.00
-Equity Shares of `10 each 6.50
Reserve & Surplus 950.00 25.00
Total 1300.00 31.50
Assets
Net Fixed Assets 220.00 0.50
Net Current Assets 1020.00 29.00
Deferred Tax Assets 60.00 2.00
Total 1300.00 31.50
H Ltd. proposes to buy out B Ltd. and the following information is provided
to you as part of the scheme of buying
(1) The weighted average post tax maintainable profits of H ltd. and B
Ltd. for the last 4 years are `300 crores and `10 Crores respectively
(2) Both the companies envisages a capitalization rate of 8%
(3) H Ltd. has a contingent liability of `300 crores as on 31st March 2012
(4) H Ltd. to issue shares of `100 each to the shareholders of B Ltd. in

terms of the exchange ratio as arrived on a Fair Value Basis. (Please
consider weights of 1 and 3 for the value of shares arrived on Net Asset
Basis and Earnings Capitalization Method respectively for both H Ltd.
and B Ltd.

CA Final SFM
You are required to arrive at the value of the shares of both H Ltd. and B Ltd.
under:
(i) Net Asset Value Method

(ii) Earnings Capitalisation Method
(iii) Exchange ratio of shares of H Ltd. to be issued to the shareholders of
B Ltd. on a Fair value basis (taking into consideration the assumption
mentioned in point 4 above.)
2. ABC Company is considering acquisition of XYZ ltd. which has 1.5 crores
shares outstanding and issued. The market price per share is `400 at present.
ABC’s average cost of capital is 12%. Available information from XYZ
indicates its expected cash accruals for the next 3 years as follows.
Year ` in Crores
1 250
2 300
3 400
Calculate the range of valuation that ABC has to consider.
-----------------------------------[Nov 2009, 4 Marks] --------------------------------

3. Eagle Ltd. reported a profit of `77 lakhs after 30% tax for the financial year 2011-
12. An analysis of the accounts revealed that the income included extraordinary
items of `8 lakhs and an extraordinary loss of `10 lakhs. The existing operations,
except for the extraordinary items, are expected to continue in the future. In
addition, the results of the launch of a new product are expected to be as follows:
` In lakhs
Sales 70
Material costs 20
Labour costs 12
Fixed costs 10

You are required to:
i. Calculate the value of the business, given that the capitalization rate is
14%.
ii. Determine the market price per equity share, with Eagle Ltd.‘s share
capital being comprised of 1,00,000 13% preference shares of `100 each
and 50,00,000 equity shares of `10 each and the P/E ratio being 10 times.
4. The closing price of LX Ltd. is `24 per share as on 31st March, 2019 on NSE
Ltd. The Price Earnings Ratio was 6. It was found that an amount of `24 Lakhs
as, income and an extra ordinary loss of `9 lakhs were included in the
books of accounts. The existing operations except for the extraordinary items
are expected to continue in future. Further the company has launched a new
product during the year with the following expectations:
(` in Lakhs)
Sales 150
Material Cost 40
Labour Cost 34
Fixed Cost 24
The company has 5,00,000 equity shares of `10 each and 100,000 9% Preference
Shares of `100 each. The Price Earnings Ratio is 6 times. Post tax cost of capital
is 10 % p.a. Tax rate is 34%
You are required to determine:
(i) Existing Profit from old operations
(ii) The value of business
-----------------------------------[May 2019, 5 Marks]------------------------------------

CA Final SFM
5. A valuation done of an established company by a well-known analyst has

estimated a value of `500 lakhs, based on the expected free cash flow for next
year of `20 lakhs and an expected growth rate of 5%. While going through the
valuation procedure, you found that the analyst has made the mistake of using
the book values of debt and equity in his calculation. While you do not know the
book value weights he used, you have been provided with the following
information:
(i) Company has a cost of equity of 12%,
(ii) After tax cost of debt is 6%,
(iii) The market value of equity is three times the book value of equity, while
the market value of debt is equal to the book value of debt.
You are required to estimate the correct value of the company.
6. The valuation of Hansel Limited has been done by an investment analyst. Based
on an expected free cash flow of `54 lakhs for the following year and an expected
growth rate of 9 percent, the analyst has estimated the value of Hansel Limited
to be `1800 lakhs. However, he committed a mistake of using the book values
of debt and equity.
The book value weights employed by the analyst are not known, but you know
that Hansel Limited has a cost of equity of 20 percent and post tax cost of debt
of 10 percent. The value of equity is thrice its book value, whereas the market
value of its debt is nine-tenths of its book value. What is the correct value of
Hansel Ltd?

7. An established company is going to be de merged in two separate entities. The

valuation of the company is done by a well-known analyst. He has estimated a
value of `5,000 lakhs, based on the expected free cash flow for next year of `200
lakhs and an expected growth rate of 5%. While going through the valuation
procedure, it was found that the analyst has made the mistake of using the book
values of debt and equity in his calculation.
While you do not know the book value weights he used, you have been provided
with the following information:
1. The market value of equity is 4 times the book value of equity, while
the market value
2. of debt is equal to the book value of debt,
3. Company has a cost of equity of 12%,
4. After tax cost of debt is 6%.
You are required to advise the correct value of the company.
-----------------------------------[May 2018, 5 Marks] --------------------------------
8. AB Ltd. is planning to acquire and absorb the running business of XY Ltd.

The valuation is to be based on the recommendation of merchant bankers and
the consideration is to be discharged in the form of equity shares to be issued
by AB Ltd. As on 31.3.2006, the paid up capital of AB Ltd. consists of 80
lakhs shares of `10 each. The highest and the lowest market quotation during
the last 6 months were `570 and `430. For the purpose of the exchange, the
price per share is to be reckoned as the average of the highest and lowest
market price during the last 6 months ended on 31.3.06.

CA Final SFM
XY Ltd.’s Balance Sheet as at 31.3.2006 is summarised below:

` in lakhs
Sources
Share Capital
20 Lakh equity share of `10 each fully paid 200
10 Lakh equity share of `10 each `5 paid 50
Loans 100
Total 350
Uses
Fixed Assets (net) 150
Net Current Assets 200
Total 350
An independent firm of merchant bankers engaged for the negotiation,
have produced the following estimates of cash flows from the business of
XY Ltd.:
Year ended By way of ` in lakhs
31.3.07 after tax earnings for 105
31.3.08 do 120
equity
31.3.09 Do 125
31.3.10 Do 120
31.3.11 Do 100
terminal value estimate 200
It is the recommendation of the merchant banker that the business of XY
Ltd. may be valued on the basis of the average of (i) Aggregate of
discounted cash flows at 8% and (ii) Net assets value.
Present value factors at 8% for years
1-5: 0.93 0.86 0.79 0.74 0.68
(i) Calculate the total value of the business of XY Ltd.
(ii) The number of shares to be issued by AB Ltd.; and
(iii) The basis of allocation of the shares among the shareholders of XY
Ltd.
-----------------------------------[Nov 2006, 12 Marks] ------------------------------

9. Following information is given in respect of WXY Ltd., which is expected to

grow at a rate of 20% p.a. for the next three years, after which the growth rate
will stabilize at 8% p.a. normal level, in perpetuity.
For the year ended March 31, 2014
Revenues `7,500 Crores

Cost of Goods Sold (COGS) `3,000 Crores
Operating Expenses `2,250 Crores
Capital Expenditure `750 Crores
Depreciation (included in COGS & Operating Expenses `600 Crores
During high growth period, revenues & Earnings before Interest & Tax (EBIT)
will grow at 20% p.a. and capital expenditure net of depreciation will grow at
15% p.a. From year 4 onwards, i.e. normal growth period revenues and EBIT
will grow at 8% p.a. and incremental capital expenditure will be offset by the
depreciation. During both high growth & normal growth period, net working
capital requirement will be 25% of revenues. The Weighted Average Cost of
Capital (WACC) of WXY Ltd. is 15%.
Corporate Income Tax rate will be 30%.
Required:
Estimate the value of WXY Ltd. using Free Cash Flows to Firm (FCFF) &
WACC methodology.
The PVIF @ 15 % for the three years are as below:
Year 1 2 3
PVIF 0.8696 0.7561 0.6575

CA Final SFM
10. Following information are available in respect of XYZ Ltd. which is expected to
grow at a higher rate for 4 years after which growth rate will stabilize at a lower
level: Base year information:
Revenue - `2,000 crores

EBIT - `300 crores
Capital expenditure - `280 crores
Depreciation - `200 crores
Information for high growth and stable growth period are as follows:
High Growth Stable Growth

Growth in revenue & 20% 10%
EBIT
Growth in capital 20% Capital expenditure are
expenditure and offset by depreciation
depreciation
Risk free rate 10% 9%
Equity Beta 1.15 1
Market Risk Premium 6% 5%
Pre Tax Cost of Debt 13% 12.86%
Debt Equity Ratio 1:1 2:3
For all time, working capital is 25% of revenue and corporate tax rate is 30%.
What is the value of the firm?
11. Yes Ltd. wants to acquire No Ltd. and the cash flows of Yes Ltd. and the merged
entity are given below:
(` In lakhs)
Year 1 2 3 4 5
Yes Ltd. 175 200 320 340 350
Merged Entity 400 450 525 590 620
Earnings would have witnessed 5% constant growth rate without merger and

6% with merger on account of economies of operations after 5 years in each

case. The cost of capital is 15%. The number of shares outstanding in both the
companies before the merger is the same and the companies agree to an
exchange ratio of 0.5 shares of Yes Ltd. for each share of No Ltd. PV factor
at 15% for years 1-5 are 0.870, 0.756; 0.658, 0.572, 0.497 respectively.
(i) Compute the Value of Yes Ltd. before and after merger.
(ii) Value of Acquisition and
(iii) Gain to shareholders of Yes Ltd.
---------------------------[Nov 2012, 8 Marks] ------------------------------------
12. BRS Inc deals in computer and IT hardwares and peripherals. The expected
revenue for the next 8 years is as follows:
Year Sales Revenue ($ Million)
1 8
2 10
3 15
4 22
5 30
6 26
7 23
8 30
Summarized financial position as on 31 March 2012 was as follows:

Liabilities Amount Assets Amount
Equity 12 Fixed Assets 17
Stocks (Net)
12% Bonds 8 Current Assets 3
20 20

CA Final SFM
Additional Information:
a. Its variable expenses is 40% of sales revenue and fixed operating
expenses (cash) are estimated to be as follows:
Period Amount ($ Million)
1-4 Years 1.6
5-8 Years 2
b. An additional advertisement and sales promotion campaign shall be
launched requiring expenditure as per following details:
Period Amount ($ Million)
1 Year 0.50
2-3 Years 1.50
4-6 Years 3.00
7-8 Years 1.00
c. Fixed assets are subject to depreciation at 15% as per WDV method.
d. The company has planned additional capital expenditures (in the
beginning of each year) for the coming 8 years as follows:
Year Sales Revenue ($ Million)
1 0.50
2 0.80
3 2.00
4 2.50
5 3.50
6 2.50
7 1.50
8 1.00
e. Investment in Working Capital is estimated to be 20% of Revenue.
f. Applicable tax rate for the company is 30%.
g. Cost of Equity is estimated to be 16%.
h. The Free Cash Flow of the firm is expected to grow at 5% per
annuam after 8 years.
With above information you are require to determine the:
(i) Value of Firm
(ii) Value of Equity

13. ABC (India) Ltd., a market leader in printing industry, is planning to diversify
into defense equipment businesses that have recently been partially opened up
by the GOI for private sector. In the meanwhile, the CEO of the company wants
to get his company valued by a leading consultants, as he is not satisfied with
the current market price of his scrip.
He approached consultant with a request to take up valuation of his company

with the following data for the year ended 2009:
Share Price `66 per share
Outstanding debt 1934 Lakhs
Number of outstanding shares 75 Lakhs
Net income (PAT) 17.2 Lakhs
EBIT 245 Lakhs
Interest expenses 218.125 Lakhs
Capital expenditure 234.40 Lakhs
Depreciation 234.40 Lakhs
Working capital 44 Lakhs
Growth rate 8% (from 2010 to 2014)
Growth rate 6% (beyond 2014)
Free cash flow (Year 2014 onwards) 240.336 Lakhs
The capital expenditure is expected to be equally offset by depreciation in
future and the debt is expected to decline by 30% in 2014.
Required:
Estimate the value of the company and ascertain whether the ruling market
price is undervalued as felt by the CEO based on the foregoing data. Assume
that the cost of equity is 16%, and 30% of debt repayment is made in the year
2014.

CA Final SFM
14. Personal computer division of Distress ltd. a computer hardware manufacturing

company has started facing financial difficulties for the last 2 to 3 years. The
management of the division headed by Mr. Smith is interested in a buyout on 1
April 2013. However, to make this buyout successful there is an urgent need to
attract substantial funds from venture capitalists.
Ven Cap, a European venture capitalist firm has shown its interest to finance the
proposed buy-out. Distress Ltd. is interested to sell the division for `180 crores
and Mr. Smith is of opinion that an additional amount of `85 crores shall be
required to make this division viable. The expected financing pattern shall be as
follows:
Source Mode Amount (`Crores)

Management Equity shares of `10 60.00
each
Vencap VC Equity shares of `10 22.50
each
9% debentures with 22.50
attached warrant of `100
each
8% Loan 160
Total 265.00
The warrants can be exercised any time after 4 years from now for 10 equity
shares @`120 per share.
The loan is repayable in one go at the end of 8th year. The debentures are
repayable in equal installment consisting of both principal and interest amount
over a period of 6 years.
Mr. Smith is of view that the proposed dividend shall not be kept more than
12.5% of distributable profit for the first 4 years. The forecasted EBIT after
the proposed buyout is as follows:
Year 2013-14 2014-15 2015-16 2016-17
EBIT (` in cores) 48 57 68 82
Applicable tax rate is 35% and it is expected that it shall remain unchanged at
least for 5-6 years. In order to attract VenCap. Mr. Smith stated that book
value of equity shall increase by 20% during above 4 years. Although, Vencap
has shown their interest in investment but are doubtful about the projections

of growth in the value as per projections of Mr.Smith. Further VenCap also

demanded that warrants should be convertible in 18 shares instead of 10 as
proposed by Mr. Smith.
You are required to determine whether or not the book value of equity is
expected to grow by 20% per year. Further if you have been appointed by Mr.
Smith as advisor then whether you would suggest to accept the demand of
VenCap of 18 shares instead of 10 or not.
-----------------------------------[RTP May 2014] -----------------------------------
15. Tender Ltd. has earned a net profit of `15 lacs after tax at 30%. Interest cost
charged by financial institutions was `10 lacs. The invested capital is `95 lacs
of which 55% is debt. The company maintains a weighted average cost of
capital of 13%.
Required
a. Compute the operating income.
b. Compute the Economic Value Added (EVA).
c. Tender Ltd. has 6 lac equity shares outstanding. How much dividend
can the company pay before the value of the entity starts declining?
-----------------[Nov 2007, 6 Marks]-------------[May 2011, 8 Marks]------------------------
16. RST Ltd.’s current financial year's income statement reported its net income
as `25,00,000. The applicable corporate income tax rate is 30%.
Following is the capital structure of RST Ltd. at the end of current financial
year:
`
Debt (Coupon rate = 11%) 40 lakhs
Equity (Share Capital + Reserves & Surplus) 125 lakhs
Invested Capital 165 lakhs

CA Final SFM
Following data is given to estimate cost of equity capital:

Beta of RST Ltd. 1.36
Risk –free rate i.e. current yield on Govt. bonds 8.5%
Average market risk premium 9%
(i.e. Excess of return on market portfolio over risk-free rate)
Required:
(i) Estimate Weighted Average Cost of Capital (WACC) of RST Ltd.; and
(ii) Estimate Economic Value Added (EVA) of RST Ltd.
17. The following data pertains to XYZ Inc. engaged in software consultancy
business as on 31 December 2010
($ Million)
Income from Consultancy 935
EBIT 180
Less: Interest on Loan 18
EBT 162
Tax @ 35% 56.70
105.30
Balance Sheet
Equity Stock (10 100 Land and 200
Million Shares at Building
$10 each)
Reserves and 325 Computers and 295
Surplus Software
Loans 180 Current Assets
Current Liabilities 180 Debtors 150
Bank 100
Cash 40 290
785 785

With the above information and following assumption you are required to
compute
(a) Economic Value Added®
(b) Market Value Added.
Assuming that:
(i) WACC is 12%.
(ii) The share of company currently quoted at $ 50 each
18. Herbal Gyan is a small but profitable producer of beauty cosmetics using the
plant Aloe Vera. This is not a high-tech business, but Herbal’s earnings have
averaged around `12 lakh after tax, largely on the strength of its patented beauty
cream for removing the pimples.
The patent has eight years to run, and Herbal has been offered `40 lakhs for the
patent rights. Herbal’s assets include `20 lakhs of working capital and `80 lakhs
of property, plant, and equipment. The patent is not shown on Herbal’s books.
Suppose Herbal’s cost of capital is 15 percent. What is its Economic Value
Added (EVA)?
19. Herbal World is a small, but profitable producer of beauty cosmetics using the
plant Aloe Vera. Though it is not a high-tech business, yet Herbal's earnings
have averaged around `18.5 lakh after tax, mainly on the strength of its
patented beauty cream to remove the pimples. The patent has nine years to run,
and Herbal has been offered `50 lakhs for the patent rights. Herbal's assets
include `50 lakhs of property, plant and equipment and `25 lakhs of working
capital. However, the patent is not shown in the books of Herbal World.
Assuming Herbal's cost of capital being 14 percent, calculate its Economic
Value Added (EVA).
------------------------------[Nov 2018, 5 Marks] ---------------------------------

CA Final SFM
20. ABC Ltd. has divisions A,B& C. The division C has recently reported on annual
operating profit of `20,20,00,000. This figure arrived at after charging `3 crores
full cost of advertisement expenditure for launching a new product. The
benefits of this expenditure is expected to be lasted for 3 years.
The cost of capital of division C is 11% and cost of debt is 8%.
The Net Assets (Invested Capital) of Division C as per latest Balance Sheet is
`60 crore, but replacement cost of these assets is estimated at `84 crore.
You are required to compute EVA of the Division C.
21. With the help of the following information of Jatayu Limited compute the
Economic Value Added:
Capital Structure
Equity Capital of `160 lakhs
Reserves and Surplus `140 Lakhs
10% Debentures `400 Lakhs
Cost of Equity 14%
Financial leverage 1.5 times
Income Tax Rate 30%
22. Consider the following operating information gathered from 3 companies that
are identical except for their capital structures:
P Ltd. Q Ltd. R Ltd.
Total invested capital €100,000 €100,000 €100,000
Debt/assets ratio 0.80 0.50 0.20
Shares outstanding 6,100 8,300 10,000
Before-tax cost of debt 14% 12% 10%
Cost of equity 26% 22% 20%

Operating income, (EBIT) €25,000 €25,000 €25,000

Net Income €8,970 €12,350 €14,950
Tax rate 35% 35% 35%
(a) Compute the weighted average cost of capital, WACC, for each firm.
(b) Compute the Economic Value Added, EVA, for each firm.
(c) Based on the results of your computations in part b, which firm would
be considered the best investment? Why?
(d) Assume the industry P/E ratio generally is 15 ×. Using the industry
norm, estimate the price for each share.
(e) What factors would cause you to adjust the P/E ratio value used in part
d so that it is more appropriate?
23. The following information is given for 3 companies that are identical except for
their capital structure:
Orange Grape Apple
Total invested capital 1,00,000 1,00,000 1,00,000
Debt/assets ratio 0.8 0.5 0.2
Shares outstanding 6,100 8,300 10,000
Pre tax cost of debt 16% 13% 15%
Cost of equity 26% 22% 20%
Operating Income (EBIT) 25,000 25,000 25,000
Net Income 8,970 12,350 14,950
The tax rate is uniform 35% in all cases.
a. Compute the Weighted average cost of capital for each company.
b. Compute the Economic Valued Added (EVA) for each company.
c. Based on the EVA, which company would be considered for best
investment? Give reasons.

CA Final SFM
d. If the industry PE ratio is 11x, estimate the price for the share of each
company.
e. Calculate the estimated market capitalisation for each of the
Companies.
24. Trupti Co. Ltd. promoted by a Multinational group “INTERNATIONAL INC”

is listed on stock exchange holding 84% i.e. 63 lakhs shares.
Profit after Tax is `4.80 crores.
Free Float Market Capitalisation is `19.20 crores.
As per the SEBI guidelines promoters have to restrict their holding to 75% to
avoid delisting from the stock exchange. Board of Directors has decided not to
delist the share but to comply with the SEBI guidelines by issuing Bonus shares
to minority shareholders while maintaining the same P/E ratio.
Calculate
(i) P/E Ratio
(ii) Bonus Ratio
(iii) Market price of share before and after the issue of bonus shares
(iv) Free Float Market capitalization of the company after the bonus shares.
25. Following details are available for X Ltd.

Income Statement for the year ended 31st March, 2018
Particulars Amount
Sales 40,000
Gross Profit 12,000
Administrative Expenses 6,000
Profit Before tax 6,000
Tax @ 30% 1,800
Profit After Tax 4,200

Balance sheet as on 31st March, 2018

Particulars Amount
Fixed Assets 10,000
Current Assets 6,000
Total Assets 16,000
Equity Share Capital 15,000
Sundry Creditors 1,000
Total Liabilities 16,000
The Company is contemplating for new sales strategy as follows :
(iii) Sales to grow at 30% per year for next four years.
(iv) Assets turnover ratio, net profit ratio and tax rate will remain the
same.
(v) Depreciation will be 15% of value of net fixed assets at the
beginning of the year.
(vi) Required rate of return for the company is 15%
Evaluate the viability of new strategy.
------------------------------[Nov 2018, 12 Marks] ---------------------------------
26. ABC Co. is considering a new sales strategy that will be valid for the next 4
years. They want to know the value of the new strategy. Following information
relating to the year which has just ended, is available:
Income Statement `
Sales 20,000
Gross margin (20%) 4,000
Administration, Selling & distribution expense (10%) 2,000
PBT 2,000
Tax (30%) 600
PAT 1,400
Balance Sheet Information
Fixed Assets 8,000
Current Assets 4,000
Equity 12,000

CA Final SFM
If it adopts the new strategy, sales will grow at the rate of 20% per year for
three years. The gross margin ratio, Assets turnover ratio, the Capital structure
and the income tax rate will remain unchanged.
Depreciation would be at 10% of net fixed assets at the beginning of the year.
The Company’s target rate of return is 15%.
Determine the incremental value due to adoption of the strategy.
----------------------------------[RTP May 2017] -------------------------------------
27. Using the chop-shop approach (or Break-up value approach), assign a value
for Cranberry Ltd. whose stock is currently trading at a total market price of
€4 million. For Cranberry Ltd, the accounting data set forth three business
segments: consumer wholesale, retail and general centers. Data for the firm's
three segments are as follows:
Business Segment Segment Segment Operating

Segment Sales Assets Income
Wholesale €225,000 €600,000 €75,000
Retail €720,000 €500,000 €150,000
General € 2,500,000 €4,000,000 €700,000
Industry data for “pure-play” firms have been compiled and are summarized
as follows:
Business Sales Assets Operating
Segment /Capitalization /Capitalization Income
/Capitalization
Wholesale 1.18 1.43 0.11
Retail 0.83 1.43 0.125
General 1.25 1.43 0.25
---------------------------------[RTP May, 2018] -------------------------------------

28. T Ltd. Recently made a profit of `50 crore and paid out `40 crore (slightly
higher than the average paid in the industry to which it pertains). The average
PE ratio of this industry is 9. As per Balance Sheet of T Ltd., the shareholder's
fund is `225 crore and number of shares is 10 crore. In case company is
liquidated, building would fetch `100 crore more than book value and stock
would realize `25 crore less.
The other data for the industry is as follows:
Projected Dividend Growth 4%
Risk Free Rate of Return 6%
Market Rate of Return 11%
Average Dividend Yield 6%
The estimated beta of T Ltd. is 1.2. You are required to calculate value of T
Ltd. using
(i) P/E Ratio
(ii) Dividend Yield
(iii) Valuation as per:
(1) Dividend Growth Model
(2) Book Value
(3) Net Realizable Value
----------------------------------[RTP Nov, 2018] -------------------------------------

Chapter 14 Mergers, Acquisitions & Corporate Restructuring
Chapter 14
Mergers, Acquisitions and Corporate
Restructuring
Q1. Define Mergers and Acquisitions
Answer:
Merger
Merger can be defined as “The combination of one or
more corporations or business entities into a single
business entity; the joining of two or more companies to
achieve greater efficiencies of scale and productivity”.
Acquisition
An acquisition or takeover is the purchase of one business
or company by another company or other business entity.
This includes acquiring directly or indirectly shares, voting
rights, assets or control over management or assets of
another enterprise.
Distinction between mergers and acquisitions
When one company takes over another and completely establishes itself as the
new owner, the purchase is called an "acquisition". From a legal point of view,
in an acquisition, the target company still exists as an independent legal entity,
which is controlled by the acquirer.
In the pure sense of the term, a merger happens when two firms agree to go
forward as a single new company rather than remain separately owned and
operated.
Q2. What is the need of Mergers and Acquisitions or why does two companies
get merged?
Answer:
The most common reasons for Mergers and Acquisition (M&A) are:
1. Synergistic operating economics:
a. Synergy May be defined as follows: V (AB) > V(A) + V (B).

CA Final SFM
b. In other words the combined value of two firms or companies shall

be more than their individual value Synergy is the increase in
performance of the combined firm over what the two firms are
already expected or required to accomplish as independent firms
c. This may be result of complimentary services economics of scale or
both. A good example of complimentary activities can a company
may have a good networking of branches and other company may
have efficient production system.
d. Thus, the merged companies will be more efficient than individual
companies. On similar lines, economics of large scale is also one of
the reasons for synergy benefits.
e. The main reason is that, the large scale production results in lower
average cost of production e.g. reduction in overhead costs on
account of sharing of central services such as accounting and
finances, office executives, top level management, legal, sales
promotion and advertisement etc.
2. Diversification:
a. In case of merger between two unrelated companies would lead to
reduction in business risk, which in turn will increase the market
value consequent upon the reduction in discount rate/ required
rate of return.
b. Normally, greater the combination of statistically independent or
negatively correlated income streams of merged companies, there
will be higher reduction in the business risk in comparison to
companies having income streams which are positively correlated
to each other.
3. Taxation:
a. The provisions of set off and carry forward of losses as per Income
Tax Act may be another strong season for the merger and
acquisition.
b. Thus, there will be Tax saving or reduction in tax liability of the
merged firm. Similarly, in the case of acquisition the losses of the
target company will be allowed to be set off against the profits of
the acquiring company.

4. Growth:
a. Merger and acquisition mode enables the firm to grow at a rate
faster than the other mode viz., organic growth.
b. The reason being the shortening of ‘Time to Market’. The acquiring
company avoids delays associated with purchasing of building, site,
setting up of the plant and hiring personnel etc.
5. Consolidation of Production
a. Capacities and increasing market power: Due to reduced
competition, marketing power increases.
b. Further, production capacity is increased by combined of two or
more plants. The following table shows the key rationale for some
of the well known transactions which took place in India in the
recent past.
Q3. Give some examples of recent mergers and rationale for M & A.
Answer:
Rationale for M & A
Instantaneous growth, Snuffing • Airtel – Loop Mobile (2014)

out competition, Increased (Airtel bags top spot in Mumbai Telecom Circle)
market share.
Acquisition of a competence or a • Google – Motorola (2011)

capability (Google got access to Motorola’s 17,000 issued
patents and 7500 applications)
Entry into new markets/product • Airtel – Zain Telecom (2010) (Airtel enters
segments 15 nations of African Continent in one shot)
Access to funds • Ranbaxy – Sun Pharma (2014)

(Daiichi Sankyo sold Ranbaxy to generate
funds)
Tax benefits • Burger King (US) – Tim Hortons(Canada)

(2014)
(Burger King could save taxes in future)

CA Final SFM
Instantaneous growth, Snuffing • Facebook – Whatsapp (2014)

out competition, Increased (Facebook acquired its biggest threat in chat
market share. space)
Acquisition of a competence or a • Flipkart – Myntra (2014) (Flipkart poised to
capability strengthen its competency in apparel e-
commerce market)
Entry into new markets/product • Cargill – Wipro (2013)
segments (Cargill acquired Sunflower Vanaspati oil
business to enter Western India Market)
Access to funds • Jaypee – Ultratech (2014)
(Jaypee sold its cement unit to raise funds
for cutting off its debt)
Tax benefits • Durga Projects Limited (DPL) – WBPDCL
(2014)
(DPL’s loss could be carry forward and
setoff)
Q4. What are the objectives for which amalgamation may be resorted to?
Answer:
a. Horizontal growth to achieve optimum size, to enlarge the market share,
to curb competition or to use unutilised capacity;
b. Vertical combination with a view to economising costs and eliminating
avoidable sales-tax and/or excise duty;
c. Diversification of business;
d. Mobilising financial resources by utilising the idle funds lying with another
company for the expansion of business. (For example, nationalisation of
banks provided this opportunity and the erstwhile banking companies
merged with industrial companies);
e. Merger of an export, investment or trading company with an industrial
company or vice versa with a view to increasing cash flow;
f. Merging subsidiary company with the holding company with a view to
improving cash flow;
g. Taking over a ‘shell’ company which may have the necessary industrial
licenses etc., but whose promoters do not wish to proceed with the
project..

Q5. Discuss the different types of mergers.

Answer:
1) A Horizontal Merger is usually between two companies in the same business
sector. The example of horizontal merger would be if a health care system
buys another health care system. This means that synergy can obtained
through many forms including such as; increased market share, cost savings
and exploring new market opportunities.
2) A Vertical Merger represents the buying of supplier of a business. In the
same example as above if a health care system buys the ambulance services
from their service suppliers is an example of vertical buying. The vertical
buying is aimed at reducing overhead cost of operations and economy of
scale.
3) Conglomerate Merger is the third form of M&A process which deals the
merger between two irrelevant companies. The example of conglomerate
M&A with relevance to above scenario would be if the health care system
buys a restaurant chain. The objective may be diversification of capital
investment.
4) Congeneric Merger is a merger where the acquirer and the related
companies are related through basic technologies, production processes or
markets. The acquired company represents an extension of product line,
market participants or technologies of the acquirer. These mergers represent
an outward movement by the acquirer from its current business scenario to
other related business activities.
5) Reverse Merger Such mergers involve acquisition of a public (Shell Company)
by a private company, as it helps private company to by-pass lengthy and
complex process required to be followed in case it is interested in going
public.
Q6. Write short note Gains from Mergers or Synergy.

Answer:
✓ The first step in merger analysis is to identify the economic gains from the
merger.
✓ There are gains, if the combined entity is more than the sum of its parts.
That is, Combined value > (Value of acquirer + Stand alone value of target)

CA Final SFM
✓ The difference between the combined value and the sum of the values of
individual companies is usually attributed to synergy.
Value of acquirer + Stand alone Value of target + Value of synergy =
Combined value
✓ There is also a cost attached to an acquisition. The cost of acquisition is
the price premium paid over the market value plus other costs of
integration.
✓ Therefore, the net gain is the value of synergy minus premium paid.
VA = `100
VB = `50
VAB = `175
Where,
VA = Value of Acquirer
VB = Standalone value of target
And, VAB = Combined Value
So, Synergy = VAB – (VA + VB) = 175 - (100 + 50) = 25
If premium is `10, then,
Net gain = Synergy – Premium = 25 – 10 = 15
✓ Acquisition need not be made with synergy in mind. It is possible to make

money from nonsynergistic acquisitions as well. As can be seen from
Exhibit, operating improvements are a big source of value creation.
✓ Better post-merger integration could lead to abnormal returns even when
the acquired company is in unrelated business.
✓ Obviously, managerial talent is the single most important instrument in
creating value by cutting down costs, improving revenues and operating
profit margin, cash flow position, etc.
✓ Many a time, executive compensation is tied to the performance in the
post-merger period. Providing equity stake in the company induces
executives to think and behave like shareholders.

Q7. What kind of issues are addressed by the Financial Evaluation process in
Merger?
Answer:
✓ Financial analysis is the process of evaluating businesses and other finance-
related entities to determine their performance and suitability.
✓ Typically, financial analysis is used to analyze whether an entity is stable,
solvent, liquid or profitable enough to warrant a monetary investment.
✓ When looking at a specific company, a financial analyst conducts analysis by
focusing on the income statement, balance sheet and cash flow statement.
✓ Financial evaluation addresses the following issues:
a. What is the maximum price that should be for the target company?
b. What are the principal areas of Risk?
c. What are the cash flow and balance sheet implications of the
acquisition? And,
d. What is the best way of structuring the acquisition?
Q8. Explain the various Takeover Strategies.

Answer:
Various takeover Strategies
1. Tender Offer: Tender offer is a corporate finance Tender offer in News
term denoting a type of takeover bid. The tender
offer is a public, open offer or invitation (usually
announced in a newspaper advertisement) by a
prospective acquirer to all stockholders of a publicly
traded corporation (the target corporation) to tender
their stock for sale at a specified price during a
specified time, subject to the tendering of a minimum
and maximum number of shares.
In a tender offer, the bidder contacts shareholders directly; the directors of
the company may or may not have endorsed the tender offer proposal. To
induce the shareholders of the target company to sell, the acquirer's offer
price usually includes a premium over the current market price of the target
company's shares.

CA Final SFM
For example, if a target corporation's stock was trading at $10 per share, an
acquirer might offer $11.50 per share to shareholders on the condition that
51% of shareholders agree. Cash or securities may be offered to the target
company's shareholders, although a tender offer in which securities are
offered as consideration is generally referred to as an "exchange offer."
2. Street Sweep: In street sweep the larger number of target company’s shares
are quickly purchased by the acquiring company before it makes an open
offer. Thus, anyhow Target Company has to accept the offer of the takeover
made by the acquiring company. It is also known as market sweep.
3. Bear Hug: A buyout offer so favourable to stockholders of a company
targeted for acquisition that there is little likelihood they will refuse the
offer. Not only does a bear hug offer a price significantly above the market
price of the target company's stock, but it is likely to offer cash payments as
well.
4. Strategic Alliance: SA is a kind of partnership between two entities in which
they take advantage of each other’s core strengths like proprietary
processes, intellectual capital, research, market penetration, manufacturing
and/or distribution capabilities etc. They share their core strengths with
each other. They will have an open door relationship with another entity and
will mostly retain control. The length of the agreement could have a sunset
date or could be open-ended with regular performance reviews. However,
they simply would want to work with the other organizations on a
contractual basis, and not as a legal partnership.
Example: HP and Oracle had a strategic alliance wherein HP recommended
Oracle as the perfect database for their servers by optimizing their servers
as per Oracle and Oracle also did the same.
5. Brand Power: This refers to entering into an alliance with powerful brands
to displace the target’s brands and as a result, buyout the weakened
company.

Q9. How to defend a Takeover Bid (Antitakeover strategy)?

Answer:
Takeover defences include actions by managers to resist having their firms
acquired by other companies. There are several methods to defend a takeover.
1. Crown Jewel Defense: The target company has the right to sell off the entire
or some of the company’s most valuable assets when facing a hostile bid in the
hope to make the company less attractive in the eyes of the acquiring company
and to force a drawback of the bid.
2. Poison Pill: Poison pill can be described as shareholders' rights, preferred
rights, stock warrants, stock options which the target company offers and
issues to its shareholders. The logic behind the pill is to dilute the targeting
company’s stock in the company so much that bidder never manages to
achieve an important part of the company without the consensus of the board.
3. Poison Put: Here the company issue bonds which will encourage the holder of
the bonds to cash in at higher prices which will result in Target Company being
less attractive.
4. Greenmail: Where the bidders are interested in short term profit rather than
long term corporate control then the effective strategy will be to use
Greenmail also known as Goodbye Kiss. Greenmail involves repurchasing a
block of shares which is held by a single shareholder or other shareholders at
a premium over the stock price in return for an agreement called as standstill
agreement. In this agreement it is stated that bidder will no longer be able to
buy more shares for a period of time often longer than five years.
5. White Knight: The target company seeks for a friendly company which can
acquire majority stake in the company and is therefore called a white knight.
The intention of the white knight is to ensure that the company does not lose
its management. In the hostile takeover there are lots of chances that the
acquired changes the management.
6. White squire: A different variation of white knight is white squire. Instead of
acquiring the majority stake in the target company white squire acquires a
smaller portion, but enough to hinder the hostile bidder from acquiring
majority stake and thereby fending off an attack.
7. Golden Parachutes: A golden parachute is an agreement between a company
and an employee (usually upper executive) specifying that the employee will

CA Final SFM
receive certain significant benefits if employment is terminated. This will

discourage the bidders and hostile takeover can be avoided.
8. Pac-man defense: The target company itself makes a counter bid for the
Acquirer Company and let the acquirer company defense itself which will call
off the proposal of takeover.
Q10. Explain Takeover by Reverse Bid.

Answer:
"Acquisition" usually refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will acquire management control of a larger
and/or longer-established company and retain the name of the latter for the post-
acquisition combined entity. This is known as a reverse takeover. Another type of
acquisition is the reverse merger, a form of transaction that enables a private
company to be publicly listed in a relatively short time frame. A reverse merger
occurs when a privately held company (often one that has strong prospects and is
eager to raise financing) buys a publicly listed shell company, usually one with no
business and limited assets.
Three test requirements for takeover by reverse bid:
1. The assets of the transferor company are greater than the transferee
company.
2. Equity capital to be issued by the transferee company for acquisition should
exceed its original share capital.
3. There should be a change of control in transferee company by way of
introduction of a minority holder or group of holders
Q11. What are the benefits of the Reverse Merger?

Answer:
1. Easy access to capital market.
2. Increase in visibility of the company in corporate world.
3. Tax benefits on carry forward losses acquired (public) company.
4. Cheaper and easier route to become a public company.

Q12. What is Divestiture and what are the reasons for divestment or demerger?
Answer:
Divestiture means it means a company selling one of the portions of its divisions
or undertakings to another company or creating an altogether separate company.
There are various reasons for divestment or demerger viz.,
1. To pay attention on core areas of business;
2. The Division’s/business may not be sufficiently contributing to the
revenues;
3. The size of the firm may be too big to handle;
4. The firm may be requiring cash urgently in view of other investment
opportunities.
Q13. Explain the reason for selling the company or Explain the sell side
imperatives.
Answer:
✓ Competitor’s pressure is increasing.
✓ Sale of company seems to be inevitable because company is facing serious
problems like:
a. No access to new technologies and developments
b. Strong market entry barriers. Geographical presence could not be
enhanced
c. Badly positioned on the supply and/or demand side
d. Critical mass could not be realised
e. No efficient utilisation of distribution capabilities
f. New strategic business units for future growth could not be
developed
g. Not enough capital to complete the project
✓ Window of opportunity: Possibility to sell the business at an attractive price
✓ Focus on core competencies
✓ In the best interest of the shareholders – where a large well-known firm
brings-up the proposal, the target firm may be more than willing to give-
up.

CA Final SFM
Q14. Explain the different ways of demerger or divestment.

Answer:
1. Sell off: It refers to the selling a particular division, asset, product line,
subsidiary or factory to another entity for an agreed upon sum which may
be payable either in cash or securities.
2. Spin-off: It refers to the separation of the part of the existing business and
creating a new entity. Shareholders of the existing company continue to
be the shareholders of the new entity with proportionate ownership.
There is no inflow of cash as compared to sell off strategy. The reason
behind spin off divestiture is the intention of the management to have
specialization in a particular area.
Example: Kishore Biyani led Future Group spin off its consumer durables
business, Ezone, into a separate entity in order to maximise value from it.
3. Split-up: A corporate action in which a single company splits into two or
more separately run companies. Shares of the original company are
exchanged for shares in the new companies, with the exact distribution
of shares depending on each situation. This is an effective way to break
up a company into several independent companies. After a split-up, the
original company ceases to exist.
Example: Philips, the Dutch conglomerate that started life making light
bulbs 123 years ago, is splitting off its lighting business in a bold step to
expand its higher-margin healthcare and consumer divisions. The new
structure should save 100 million euros ($128.5 million) next year and 200
million euros in 2016. It expects restructuring charges of 50 million euros
from 2014 to 2016.
4. Equity Carve outs: This is like spin off, however, some shares of the new
company are sold in the market by making a public offer, so this brings
cash. More and more companies are using equity carve-outs to boost
shareholder value. A parent firm makes a subsidiary public through an
initial public offering (IPO) of shares, amounting to a partial sell-off. A new
publicly-listed company is created, but the parent keeps a controlling
stake in the newly traded subsidiary.
A carve-out is a strategic avenue a parent firm may take when one of its
subsidiaries is growing faster and carrying higher valuations than other
businesses owned by the parent. A carve-out generates cash because
shares in the subsidiary are sold to the public, but the issue also unlocks

the value of the subsidiary unit and enhances the parent's shareholder
value.
The new legal entity of a carve-out has a separate board, but in most
carve-outs, the parent retains some control over it. In these cases, some
portion of the parent firm's board of directors may be shared. Since the
parent has a controlling stake, meaning that both firms have common
shareholders, the connection between the two is likely to be strong. That
said, sometimes companies carve-out a subsidiary not because it is doing
well, but because it is a burden. Such an intention won't lead to a
successful result, especially if a carved-out subsidiary is too loaded with
debt or trouble, even when it was a part of the parent and lacks an
established track record for growing revenues and profits.
5. Sale of a Division: In the case of sale of a division, the seller company is
demerging its business whereas the buyer company is acquiring a
business. For the first time the tax laws in India propose to recognise
demergers.
Q15. Write Short notes on Financial Restructuring.

Answer:
✓ Financial restructuring is the reorganizing of a business' assets and liabilities.
✓ Consequent upon losses the share capital or net worth of companies get
substantially eroded sometimes leading to negative net worth putting the
firm on the verge of liquidation.
✓ To revive from this financial restructuring is resorted to.
✓ It requires the need to re-start with the fresh balance sheet which is free
from losses and fictitious assets. This causes sacrifice on the part of
shareholders of the company.
✓ Sometimes creditors may also agree to reduce their claims and also convert
the dues to the agreed extent in securities.

CA Final SFM
Q16. Discuss the various terms covered under Ownership Restructuring.

Answer:
1. Going Private
This refers to the situation wherein a listed company is converted into a
private company by buying back all the outstanding shares from the
markets.
Example: The Essar group successfully completed Essar Energy Plc delisting
process from London Stock Exchange in 2014.
Going private is a transaction or a series of transactions that convert a
publicly traded company into a private entity. Once a company goes private,
its shareholders are no longer able to trade their stocks in the open market.
A company typically goes private when its stakeholders decide that there
are no longer significant benefits to be garnered as a public company.
Privatization will usually arise either when a company's management wants
to buy out the public shareholders and take the company private (a
management buyout), or when a company or individual makes a tender
offer to buy most or all of the company's stock. Going private transactions
generally involve a significant amount of debt.
2. Management Buy Outs
A management buyout (MBO) is a form of acquisition where a company's
existing manager acquires a large part or all of the company from either the
parent company or from the private owners.
Management buyouts are similar in all major legal aspects to any other
acquisition of a company. The particular nature of the MBO lies in the
position of the buyers as managers of the company,
An MBO can occur for a number of reasons
1. The owners of the business want to retire and want to sell the company
to the management team they trust (and with whom they have worked
for years).
2. The owners of the business have lost faith in the business and are willing
to sell it to the management (who believes in the future of the business)
in order to get some value for the business.
3. The managers see a value in the business that the current owners do not
see and do not want to pursue.

3. Leveraged Buy Outs

A leveraged buyout (LBO) is an acquisition (usually of a company, but can
also be single assets such as a real estate property) where the purchase price
is financed through a combination of equity and debt and in which the cash
flows or assets of the target are used to secure and repay the debt.
In other words, the acquisition of another company using a significant
amount of borrowed money (bonds or loans) to meet the cost of acquisition.
Since the debt always has a lower cost of capital than the equity, the returns
on the equity increase with increasing debt. The debt thus effectively serves
as a lever to increase returns which explains the origin of the term LBO.
LBOs can have many different forms such as Management Buy-out (MBO),
Management Buy-in (MBI), secondary buyout and tertiary buyout, among
others, and can occur in growth situations, restructuring situations and
insolvencies.
4. Equity Buy Back
This refers to the situation wherein a company buys back its own shares back
from the market. This results in reduction in the equity capital of the
company. This strengthen the promoter’s position by increasing his stake in
the equity of the company.
The buyback is a process in which a company uses its surplus cash to buy
shares from the public. It is almost the opposite of initial public offer in
which shares are issued to the public for the first time. In buyback, shares
which have already been issued are bought back from the public. And, once
the shares are bought back, they get absorbed and cease to exist.
For example, a company has one crore outstanding shares and owing a huge
cash pile of Rs. 5 crores. Since, the company has very limited investment
options it decides to buy back some of its outstanding shares from the
shareholders, by utilizing some portion of its surplus cash. Accordingly, it
purchases 10 lakh shares from the existing shareholders by paying Rs. 20 per
share. total cash of say, Rs. 2 Crore. Example Cairn India bought back 3.67
crores shares and spent nearly `1230 crores by May 2014.

CA Final SFM
Q17. State the consequences of Equity Buy Back.

Answer
There are several effects or consequences of buyback some of which are as follows:
1) It increases the proportion of shares owned by controlling shareholders as
the number of outstanding shares decreases after the buyback.
2) Earnings Per Share (EPS) escalates as the number of shares reduces leading
the market price of shares to step up.
3) A share repurchase also effects a company’s financial statements as follows:
(a) In balance sheet, a share buyback will reduce the company’s total
assets position as cash holdings will be reduced and consequently as
shareholders' equity reduced it results in reduction on the liabilities
side by the same amount.
(b) Amount spent on share buybacks shall be shown in Statement of
Cash Flows in the “Financing Activities” section, as well as from the
Statement of Changes in Equity or Statement of Retained Earnings.
4) Ratios based on performance indicators such as Return on Assets (ROA) and
Return on Equity (ROE) typically improve after a share buyback. This can be
understood with the help of following Statement showing Buyback Effect of
a hypothetical company using `1.50 crore of cash out of total cash of `2.00
for buyback.
Before Buyback After Buyback (`)
Cash (`) 2,00,00,000 50,00,000
Assets (`) 5,00,00,000 3,50,00,000
Earnings (`) 20,00,000 20,00,000
No. of Shares outstanding (Nos.) 10,00,000 9,00,000
Return on Assets (%) 4.00% 5.71%
Earnings Per Share (EPS) (`) 0.20 0.22
As visible from the above figure, the company's cash pile has been reduced
from `2 crore to `50 lakh after the buyback. Because cash is an asset, this

will lower the total assets of the company from Rs. 5 Crore to `3.5 Crore.
Now, this leads to an increase in the company’s ROA, even though earnings
have not changed. Prior to the buyback, its ROA was 4% but after the
repurchase, ROA increases to 5.71%. A similar effect can be seen in the EPS
number, which increases from 0.20 to 0.22.
Q18. Discuss some of the case studies for Mergers and Demergers
Answer
Case Study 1
Bharti Airtel to buy Loop Mobile for `700 crores
[Rationale for M & A and Valuation – Largest Customer Base]
➢ In February 2014, Bharti Airtel (“Airtel”), a leading global telecommunications services provider with
operations in 20 countries across Asia and Africa has announced to buy Mumbai based Loop Mobile.
Although the price was not stated it is understood to be in the region of around `700 crores.
➢ The proposed association will undergo seamless integration once definitive agreements are signed
and is subject to regulatory and statutory approvals.
➢ Under the agreement, Loop Mobile’s 3 million subscribers in Mumbai will join Airtel’s over 4 million
subscribers, creating an unmatched mobile network in Mumbai.
➢ The merged network will be the largest by customer base in the Mumbai circle. The proposed
transaction will bring together Loop Mobile’s 2G/EDGE enabled network supported by 2,500 plus
cell sites, and Airtel’s 2G and 3G network supported by over 4000 cell sites across Mumbai.
➢ It will also offer subscribers the widest exclusive retail reach with 220 outlets that will enable best
in class customer service.
➢ The agreement will ensure continuity of quality services to Loop Mobile’s subscribers, while offering
them the added benefits of Airtel’s innovative product portfolio and access to superior services,
innovative products like 3G, 4G, Airtel Money, VAS and domestic/international roaming facilities.
➢ Loop Mobile subscribers will become part of Airtel’s global network that serves over 289 million
customers in 20 Countries. Globally, Airtel is ranked as the fourth largest mobile services provider
in terms of subscribers.
➢ (Based on Press release hosted on Bharti Airtel’s website)

CA Final SFM
Case Study 2
Listed software company X to merge with unlisted company Y
[Rationale for M & A and Valuation – Valuation Analysis]
Company X and company Y were in the software services business. X was a listed company and Y was an
unlisted entity. X and Y decided to merge in order to benefit from marketing. Operational synergies and
economies of scale. With both companies being mid-sized, the merger would make them a larger player,
open new market avenues, bring in expertise in more verticals and wider management expertise. For
company X, the benefit lies in merging with a newer company with high growth potential and for company
Y, the advantage was in merging with a business with track record, that too a listed entity.
The stock swap ratio considered after valuation of the two businesses was 1:1.
Several key factors were considered to arrive at this valuation. Some of them were very unique to the
businesses and the deal:
✓ Valuation based on book value net asset value would not be appropriate for X and Y since they are
in the knowledge business, unless other intangibles assets like human capital, customer
relationships etc. could be identified and valued.
✓ X and Y were valued on the basis of
a) expected earnings b) market multiple.
✓ While arriving at a valuation based on expected earnings, a higher growth rate was considered for
Y, it being on the growth stage of the business life cycle while a lower rate was considered for X,
it being in the mature stage and considering past growth.
✓ Different discount factors were considered for X and Y, based on their cost of capital, fund raising
capabilities and debt-equity ratios.
✓ While arriving at a market based valuation, the market capitalization was used as the starting point
for X which was a listed company. Since X had a significant stake in Z, another listed company, the
market capitalization of X reflected the value of Z as well. Hence the market capitalization of Z had
to be removed to the extent of X’s stake from X’s value as on the valuation date.
✓ Since Y was unlisted, several comparable companies had to be identified, based on size, nature of
business etc. and a composite of their market multiples had to be estimated as a surrogate measure
to arrive at Y’s likely market capitalization, as if it were listed. This value had to be discounted to
remove the listing or liquidity premium since the surrogate measure was estimated from listed
companies.
✓ After arriving at two sets of values for X and Y, a weighted average value was calculated after
allotting a higher weight for market based method for X (being a listed company) and a higher
weight for earnings based method for Y (being an unlisted but growing company).The final values
for X and Y were almost equal and hence the 1:1 ratio was decided.

Case Study 3
Ranbaxy to Bring in Daiichi Sankyo Company Limited as Majority Partner – June 2008
[Rationale for M&A and Valuation – Acquisition at Premium]
Ranbaxy Laboratories Limited, among the top 10 generic companies in the world and India’s largest
pharmaceutical company, and Daiichi Sankyo Company Limited, one of the largest pharmaceutical
companies in Japan, announced that a binding Share Purchase and Share Subscription Agreement was
entered into between Daiichi Sankyo, Ranbaxy and the Singh family, the largest and controlling
shareholders of Ranbaxy (the “Sellers”), pursuant to which Daiichi Sankyo will acquire the entire
shareholding of the Sellers in Ranbaxy and further seek to acquire the majority of the voting capital of
Ranbaxy at a price of Rs737 per share with the total transaction value expected to be between US$3.4
to US$4.6 billion (currency exchange rate: US$1 = Rs43). On the post-closing basis, the transaction would
value Ranbaxy at US$8.5 billion.
The Share Purchase and Share Subscription Agreement has been unanimously approved by the Boards of
Directors of both companies. Daiichi Sankyo is expected to acquire the majority equity stake in Ranbaxy by
a combination of (i) purchase of shares held by the Sellers, (ii) preferential allotment of equity shares, (iii)
an open offer to the public shareholders for 20% of Ranbaxy’s shares, as per Indian regulations, and (iv)
Daiichi Sankyo’s exercise of a portion or all of the share warrants to be issued on a preferential basis. All the
shares/warrants will be acquired at a price of Rs737 per share. This purchase price represents a premium
of 53.5% to Ranbaxy’s average daily closing price on the National Stock Exchange for the three months
ending on June 10, 2008 and 31.4% to such closing price on June 10, 2008.
The deal will be financed through a mix of bank debt facilities and existing cash resources of Daiichi Sankyo.
It is anticipated that the transaction will be accretive to Daiichi Sankyo’s EPS and Operating income before
amortization of goodwill in the fiscal year ending March 31, 2010 (FY2009). EPS and Operating income after
amortization of goodwill are expected to see an accretive effect in FY2010 and FY2009, respectively.
Why would Daiichi Sankyo wanted to aquire majority stake in Ranbaxy, that too at a premium?
Ranbaxy's drive to become a research-based drug developer and major manufacturer has led it straight into
the welcoming arms of Japan's Daiichi Sankyo, that’s why it announced to buy a majority stake in the Indian
pharma company. After Sankyo completes a buyout of the founding Singh family's stake in the company,
Ranbaxy will become a subsidiary operation. The deal is valued at $4.6 billion and will create a combined
company worth about $30 billion. That move positions Daiichi Sankyo to become a major supplier of low-
priced generics to Japan's aging population and accelerates a trend by Japanese pharma companies to enter
emerging Asian markets, where they see much of their future growth. The acquisition stunned investors
and analysts alike, who were caught off guard by a bold move from a conservative player in the industry.
(Source: Fiercebiotech.com)
Also, from a financial and business perspective Ranbaxy’s revenues and bottom lines were continuously on
the rise since 2001; the R&D expenses were stable around 6%. In FY 2007 the company had revenues of
69,822 million INR ($1.5billion) excluding other income. The earnings of the company were well diversified
across the globe; however the emerging world contributed heavily to the revenues (Emerging 54%,
Developed 40%, others 6%). However, the Japan market, with low generics penetration contributed just
$25 million to the top line. The company had just begun to re-orient its strategy in favour of the emerging
markets. The product, patent and API portfolio of the company was strong. The company made 526 product
filings and received 457 approvals globally. The Company than served customers in over 125 countries and
had an expanding international portfolio of affiliates, joint ventures and alliances, operations in 56
countries. (Source: ukessays.com)

CA Final SFM
Case Study 4
Sun Pharma to acquire Ranbaxy in US$4 billion – April 2014
[Rationale for M&A and Valuation – Acquisition at Premium]
Sun Pharmaceutical Industries Ltd. and Ranbaxy Laboratories Ltd today announced that they have entered
into definitive agreements pursuant to which Sun Pharma will acquire 100% of Ranbaxy in an all-stock
transaction. Under these agreements, Ranbaxy shareholders will receive 0.8 share of Sun Pharma for each
share of Ranbaxy. This exchange ratio represents an implied value of `457 for each Ranbaxy share, a
premium of 18% to Ranbaxy’s 30-day volume-weighted average share price and a premium of 24.3% to
Ranbaxy’s 60-day volume-weighted average share price, in each case, as of the close of business on April 4,
2014. The transaction is expected to represent a tax-free exchange to Ranbaxy shareholders, who are
expected to own approximately 14% of the combined company on a pro forma basis. Upon closing, Daiichi
Sankyo will become a significant shareholder of Sun Pharma and will have the right to nominate one director
to Sun Pharma’s Board of Directors.
What prompted Daiichi Sankyo to decide on divestiture of the Indian Pharma company which it had barely
acquired just about six years ago?
It has been a rocky path for Japanese pharma major Daiichi Sankyo ever since it acquired a 63.5 per cent
stake in Indian drug maker Ranbaxy in June 2008. The Japanese drug-maker was expected to improve
manufacturing process at Ranbaxy, which has a long history of run-ins with drug regulators in the US, its
largest market, going back to 2002. Instead, serious issues persisted, resulting in a ban by the US Food &
Drug Administration on most drugs and pharmaceutical ingredients made in Ranbaxy’s four Indian
manufacturing plants. Soon after the deal was inked, in September 2008, the US drug regulator - Food and
Drug Administration - accused Ranbaxy of misrepresenting data and manufacturing deficiencies. It issued
an import ban on Ranbaxy, prohibiting the export of 30 drugs to the US, within three months after Daiichi
announced the acquisition. Following this, Ranbaxy’s sales in the US shrank almost by a fourth, and its stock
price slumped to over a fifth of the acquisition price. It has since taken Ranbaxy four years to reach a
settlement with the US regulatory authorities. In 2013, The Company agreed to pay a fine of $500 million
after admitting to false representation of data and quality issues at its three Indian plants supplying to the
US market. The company’s problems in the US are far from done with. It continues to face challenges in
securing timely approval for its exclusive products in the US markets. (Source: thehindubusinessline.com)
Why Sun Pharma take interest in acquiring Ranbaxy?
The combination of Sun Pharma and Ranbaxy creates the fifth-largest specialty generics company in the
world and the largest pharmaceutical company in India. The combined entity will have 47 manufacturing
facilities across 5 continents. The transaction will combine Sun Pharma’s proven complex product
capabilities with Ranbaxy’s strong global footprint, leading to significant value creation opportunities.
Additionally, the combined entity will have increased exposure to emerging economies while also bolstering
Sun Pharma’s commercial and manufacturing presence in the United States and India. It will have an
established presence in key high-growth emerging markets. In India, it will be ranked No. 1 by prescriptions
amongst 13 different classes of specialist doctors.
Also, from a financial and business perspective on a pro forma basis, the combined entity’s revenues are
estimated at US$ 4.2 billion with EBITDA of US$ 1.2billion for the twelve-month period ended December
31, 2013.The transaction value implies a revenue multiple of 2.2 based on12 months ended December 31,
2013. Sun Pharma expects to realize revenue and operating synergies of US$ 250 million by third year post
closing of the transaction. These synergies are expected to result primarily from topline growth, efficient
procurement and supply chain efficiencies.
(Major contents are derived from press releases hosted on website of Ranbaxy)

In summary, the challenge to valuing for M&As is to obtain a thorough understanding of the business
dynamics of both the parties, the rationale for the merger, the industry dynamics, the resulting synergies
as well as the likely risks of the transaction are required in order to ensure that the valuation is such that it
is a ‘win-win’ for both the parties and is financially viable. It is also important to understand that there are
no hard and fast rules since one is projecting the future which is ‘unknown’ based on current understanding.
Therefore, experience, good judgment and diligence are important in working out values.

CA Final SFM
Case Study 5
JLR acquisition by Tata motors and How JLR was turned around by Tata's
[Rationale for M&A and Valuation – Turnaround]
Tata’s growth strategy was to consolidate position in domestic market & expand international footprint
through development of new products by:
- Leveraging in house capabilities
- Acquisitions & collaborations to gain complementary capabilities
Why Tata Motors want to acquire Jaguar Land Rover (JLR)?
There are several reasons why Tata Motors want to acquire Jaguar Land Rover (JLR)
i. Long term strategic commitment to Automotive sector.
ii. Build comprehensive product portfolio with a global footprint immediately.
iii. Diversify across markets & products segments.
iv. Unique opportunity to move into premium segment.
v. Sharing the best practices between Jaguar, Land rover and Tata Motors in the future.
Introduction of JLR
i. Global sales of around 300,000 units, across 169 countries
ii. Global revenue of $15 Billion
iii. Nine Car lines, designed, engineered and manufactured in the UK.
iv. 16000 employees
TATA Motor’s position after acquiring JLR
Tata Motors’ market value plunged to 6,503.2 crore, with the stock hitting rock bottom
126.45 on 20 November 2008 (after the acquisition of JLR in 2008)

How Tata Motors turned JLR around
1. Favorable Currency Movements

- Significant export in dollars- North America
- Net importers of Euros in terms of material
2. Improved market sentiments.
- Retail volumes in America, Europe and China improved
3. Introduction of newer, more fuel-efficient and stylish models
- Launch of XK & New XZ Jaguar models
4. Refreshing the existing ones
5. Revival of demand in the firm’s key markets such as the UK, the US and Europe
6. Costs reductions at various levels and the formation of 10-11 cross-functional teams
7. A number of management changes, including new heads at JLR, were made
8. Workforce being trimmed since July 2008 by around 11,000
There were five key issues that persuaded Tata Motors to go ahead
Firstly, Ford had pumped in a great deal of cash to improve quality and it was just a matter of time
before this made a difference.
Secondly, JLR had very good automobile plants.
Thirdly, the steadfastness of the dealers despite losses over the past four-five years.
Fourthly, Jaguar cars had already started moving up the ranks of the annual JD Power customer
satisfaction rankings.
And, lastly, besides that, there was a crop of great new models in the pipeline, among them the
Jaguar XJ and XF and the upcoming Land Rover, which convinced Tata Motors that JLR was on the
verge of change.

CA Final SFM
Case Study 6
Dabur India Ltd.
[Rationale - Demerger]
Dabur India Ltd. ("Dabur") initiated its demerger exercise in January 2003, after the agreement of
the Board of Directors to hive off the Pharma business into a new company named Dabur Pharma
Ltd. ("DPL"). After the demerger, Dabur concentrated on its core competencies in personal care,
healthcare, and Ayurvedic specialties, while DPL focused on its expertise in oncology formulations
and bulk drugs. The demerger would allow investors to benchmark performance of these two entities
with their respective industry standards.
Results of Demerger Analysis.
Dabur FMCG Dabur Pharma Composite

Beta Equity 0.50 0.53 0.56
Re 11.52% 11.74% 11.95%
Rd (1 – t) 5.20% 5.20% 5.20%
D/E 0.22 0.07 0.4
E/V 0.82 0.93 0.71
D/V 0.18 0.07 0.29
WACC 10.38% 11.31% 10.02%
ROCE 27.70% 8.35% 19.40%
EVA 51.16 -8.49 47.08
The results of the analysis

The Dabur FMCG business unlocked value for shareholders, since the EVA of the FMCG business was more
than that of the composite business. Dabur Pharma had a negative EVA, clearly indicating that its capital
was not properly used in the composite company.
The total EVA of the FMCG and Pharma division was lesser than that of the composite business indicating
a negative synergy between the two divisions. The EVA disparity between the demerged units is expected
as FMCG and Pharma are two distinctly different businesses, where FMCG is a low capital intensity business,
the pharmaceutical business requires higher capital due to R&D activities.

Case Study 7
Bajaj Auto Ltd.
[Rationale - Demerger]
The Board of Directors of Bajaj Auto Ltd agreed to a demerger on 17th May 2007. Under the scheme,
BAL, the parent company, would be renamed Bajaj Holdings and Investment Ltd ("BHIL") and the
business was to be demerged into two new incorporated subsidiaries – Bajaj Auto Ltd ("BAL") and
Bajaj Finserv Ltd ("BFL"). The auto and manufacturing businesses of the company would be held by
BHIL while the wind power project, investments in insurance companies and consumer finance would
go to BFL. All the shareholders of the parent company became shareholders in the new companies
and were issued shares of the two new companies in the ratio 1:1.
Results of Demerger Analysis.
Composite Bajaj Auto Bajaj Fin. BHIL

Services
Beta Equity 0.67 0.72 0.77 0.53
Re 12.67% 13.04% 13.39% 11.71%
Rd (1 – t) 5.20% 5.20% 5.20% 5.20%
D/E 0.30 0.84 0.26 0.19
E/V 0.77 0.54 0.79 0.84
D/V 0.23 0.46 0.21 0.16
WACC 10.95% 9.46% 11.70% 10.67%
ROCE 18.84% 39.13% 4.35% 6.79%
EVA 138.17 474.91 -139.40 -156.46
The results of the analysis

The Auto division unlocked value for shareholders (its EVA more than that of composite business). BFL and
BHIL showed negative EVA, clearly indicating that capital was not properly used by them.
The sum total EVA of the three divisions after the demerger is greater than the composite business EVA,
indicating a successful value unlocking for the shareholders. Both these cases highlight that demergers can
unlock significant shareholder value. The markets also reacted positively, with both scrips appreciating
when the news of the demerger broke out.

CA Final SFM
Q19. Explain the reasons why mergers fail to achieve their objective
Answer:
7 reasons why mergers fail to achieve their objective
1. No common vision: In the absence of a clear
statement of what the merged company will stand
for, how the organisation will operate, what it will
feel like, and what will be different compared to
how things are today.
2. Nasty surprises resulting from poor due
diligence: This sounds basic, but happens so often.
3. Poor governance: Lack of clarity as to who decides what, and no clear issue
resolution process. Integrating the organization brings up a myriad of issues
that need fast resolution or else the project comes to a stand-still.
4. Poor communication: Messages too frequently lack relevance to their
audience and often hover at the strategic level when what employees want
to know is why the organisation is merging, why a merger is the best course
action it could take.
5. Poor program management: Insufficiently detailed implementation plans
and failure to identify key interdependencies between the many work
streams brings the project to a halt, or requires costly rework, extends the
integration timeline and causes frustration.
6. Lack of courage: Delaying some of the tough decisions that are required to
integrate the two organizations can only result in a disappointing outcome.
7. Weak leadership: Integrating two organizations is like sailing through a
storm: you need a strong captain, someone whom everyone can trust to
bring the ship to its destination, someone who projects energy, enthusiasm,
clarity, and who communicates that energy to everyone. If senior managers
do not walk the talk, if their behaviours and ways of working do not match
the vision and values the company aspires to, all credibility is lost and the
merger’s mission is reduced to meaningless words.

Q20. Explain the acquisitions through shares [Important].

Answer:
The acquirer can pay the target company in cash or exchange shares in
consideration. The analysis of acquisition for shares is slightly different. The steps
involved in the analysis are:
✓ Estimate the value of acquirer’s (self) equity;
✓ Estimate the value of target company’s equity;
✓ Calculate the maximum number of shares that can be exchanged
with the target company’s shares; and
✓ Conduct the analysis for pessimistic and optimistic scenarios.
Exchange ratio is the number of acquiring firm’s shares exchanged for each share
of the selling firm’s stock. Suppose company A is trying to acquire company B’s
100,000 shares at `230. So, the cost of acquisition is `230,00,000. Company A has
estimated its value at `200 per share. To get one share of company B, A has to
exchange (230/200) 1.15 share, or 115,000 shares for 100,000 shares of B. The
relative merits of acquisition for cash or shares should be analysed after giving due
consideration to the impact on EPS, capital structure, etc.
Normally when shares are issued in payment to the selling company’s
shareholders, stockholders will find the merger desirable only if the value of their
shares is higher with the merger than without the merger. The number of shares
that the buying company will issue in acquiring the selling company is determined
as follows:
a. The acquiring company will compare its value per share with and without
the merger.
b. The selling company will compare its value with the value of shares that
they would receive from acquiring company under the merger.
c. The managements of acquiring company and selling company will
negotiate the final terms of the merger in the light of (1) and (2); the
ultimate terms of the merger will reflect the relative bargaining position
of the two companies.
The fewer of acquiring company’s shares that acquiring company must pay to
selling company, the better off are the shareholders of acquiring company and
worse off are the shareholders of selling company. However, for the merger to be

CA Final SFM
effected, the shareholders of both the buying and selling company will have to
anticipate some benefits from the merger.
Impact of Price Earnings Ratio: The reciprocal of cost of equity is price-earning (P/E)
ratio. The cost of equity, and consequently the P/E ratio reflects risk as perceived
by the shareholders. The risk of merging entities and the combined business can
be different. In other words, the combined P/E ratio can very well be different from
those of the merging entities. Since market value of a business can be expressed
as product of earning and P/E ratio (P/E x E = P), the value of combined business is
a function of combined earning and combined P/E ratio. A lower combined P/E
ratio can offset the gains of synergy or a higher P/E ratio can lead to higher value
of business, even if there is no synergy. In ascertaining the exchange ratio of shares
due care should be exercised to take the possible combined P/E ratio into account.
Q21. Write short note on Cross Border M&A.

Answer:
Cross-border M&A is a popular route for global growth and overseas expansion.
Cross-border M&A is also playing an important role in global M&A.
This is especially true for developing countries such as India. Kaushik Chatterjee,
CFO, of Tata Steel in an interview with McKenzie Quarterly in September 2009
articulates this point very clearly. To the following question:
The Quarterly: Last year was the first in which Asian and Indian companies acquired
more businesses outside of Asia than European or US multinationals acquired
within it. What’s behind the Tata Group’s move to go global?
His response is as follows:
“India is clearly a very large country with a significant population and a big market,
and the Tata Group’s companies in a number of sectors have a pretty significant
market share. India remains the main base for future growth for Tata Steel Group,
and we have substantial investment plans in India, which are currently being
pursued. But meeting our growth goals through organic means in India,
unfortunately, is not the fastest approach, especially for large capital projects, due
to significant delays on various fronts. Nor are there many opportunities for growth
through acquisitions in India, particularly in sectors like steel, where the value to
be captured is limited—for example, in terms of technology, product profiles, the
product mix, and good management.”

Other major factors that motivate multinational companies to engage in cross-

border M&A in Asia include the following:
• Globalization of production and distribution of products and services.
• Integration of global economies.
• Expansion of trade and investment relationships on International level.
• Many countries are reforming their economic and legal systems, and
providing generous investment and tax incentives to attract foreign
investment.
• Privatization of state-owned enterprises and consolidation of the
banking industry.

CA Final SFM
Practical Questions
1. The following data is available for the acquiring firm A Ltd. and the target firm
T Ltd.
A Ltd. B Ltd.
Current Market price per share `50 `25
EPS `4.00 `1.50
Number of shares outstanding 5,00,000 60,000
Total Market value `2,50,00,000 `15,00,000
Current Earnings `20,00,000 `90,000
Find out the share exchange ratio on the basis of EPS and Market Price
2. Firm A is studying the possible acquisition of Firm B by way of merger. The

following data are available:
Firm After tax No. of equity Market price per

earnings shares share
A `10,00,000 2,00,000 `75
B `3,00,000 50,000 `60
a. If the merger goes through by exchange of equity shares and the

exchange ratio is set according to the current market prices, what is the
new earning per share of the Firm A?
b. Firm B wants to be sure that its earnings per share is not diminished
by the merger. What exchange ratio is relevant to achieve the objective?

3. M Co. Ltd. is studying the possible acquisition of N Co. Ltd., by way of merger.
The following data are available in respect of the companies:
Particulars M Co. Ltd. N Co. Ltd.
Earnings after tax (`) 80,00,000 24,00,000
No. of equity shares 16,00,000 4,00,000
Market value per share (`) 200 160
(i) If the merger goes through by exchange of equity and the exchange ratio
is based on the current market price, what is the new earning per share
for M Co. Ltd.?
(ii) N Co. Ltd. wants to be sure that the earnings available to its shareholders
will not be diminished by the merger. What should be the exchange ratio
in that case?
4. MK Ltd. is considering acquiring NN Ltd. The following information is

available:
Company Earning after tax No. of Equity Market Value

(`) Shares Per Share (`)
MK Ltd. 60,00,000 12,00,000 200.00
NN Ltd. 18,00,000 3,00,000 160.00
Exchange of equity shares for acquisition is based on current market value as

above. There is no synergy advantage available.
(i) Find the earning per share for company MK Ltd. after merger, and
(ii) Find the exchange ratio so that shareholders of NN Ltd. would not be at
a loss.

CA Final SFM
5. XYZ Ltd., is considering merger with ABC Ltd. XYZ Ltd.'s shares are
currently traded at `20. It has 2,50,000 shares outstanding and its earnings after
taxes (EAT) amount to `5,00,000. ABC Ltd., has 1,25,000 shares outstanding;
its current market price is `10 and its EAT are `1,25,000. The merger will be
effected by means of a stock swap (exchange). ABC Ltd., has agreed to a plan
under which XYZ Ltd., will offer the current market value of ABC Ltd.'s
shares:
(i) What is the pre-merger earnings per share (EPS) and P/E ratios of both
the companies?
(ii) If ABC Ltd.'s P/E ratio is 6.4, what is its current market price? What is
the exchange ratio? What will XYZ Ltd.'s post-merger EPS be?
(iii) What should be the exchange ratio; if XYZ Ltd.'s pre-merger and post-
merger EPS are to be the same?
6. Tatu Ltd. wants to takeover Mantu Ltd. and has offered a swap ratio of 1:2 (0.5
shares for every one share of Mantu Ltd.). Following information is provided
Tatu Ltd. Mantu Ltd.
Profit after tax `24,00,000 `4,80,000

Equity shares outstanding (Nos.) 8,00,000 2,40,000
EPS `3 `2
PE Ratio 10 times 7 times
Market price per share `30 `14
You are required to calculate:
(i) The number of equity shares to be issued by Tatu Ltd. for acquisition of
Mantu Ltd.
(ii) What is the EPS of Tatu Ltd. after the acquisition?
(iii) Determine the equivalent earnings per share of Mantu Ltd.

(iv) What is the expected market price per share of Tatu Ltd. after the
acquisition, assuming its PE multiple remains unchanged?
(v) Determine the market value of the merged firm.
--------------------------------[May 2018, 8 Marks] -------------------------------
7. A Ltd. wants to acquire T Ltd. and has offered a swap ratio of 1:2 following
information is provided
A Ltd. T Ltd.
Profit after tax 18,00,000 3,60,000
Equity Shares outstanding 6,00,000 1,80,000
EPS 3 2
PE Ratio 10 7
Market price per share 30 14
Required:
1. The number of equity shares to be issued by A Ltd. for acquisition of T Ltd.
2. What is the EPS of A Ltd. after the acquisition?
3. Determine the equivalent earnings per share of T Ltd?
4. What is the expected market price per share of A Ltd. after the acquisition
assuming its PE multiple remains unchanged?
5. Determine the market value of the merged firm.
8. The following information is provided related to the acquiring Firm Mark

Limited and the target Firm Mask Limited:
Mark Ltd. Mask Ltd.

Earnings after tax (`) 2000 Lacs 400 Lacs
Number of shares 200 Lacs 100 Lacs
outstanding
PE Ratio (times) 10 5

CA Final SFM
Required:
(i) What is the Swap Ratio based on current market prices?
(ii) What is the EPS of Mark Limited after acquisition?
(iii) What is the expected market price per share of Mark Limited after
acquisition, assuming P/E ratio of Mark Limited remains unchanged?
(iv) Determine the market value of the merged firm.
(v) Calculate gain/loss for shareholders of the two independent companies

after acquisition.
--------------------------------[RTP May 2018] -------------------------------------

9. Following information is provided relating to the acquiring company Mani Ltd.
and target company Ratnam Ltd:
Mani Ltd. (`) Ratnan Ltd. (`)
Earnings after tax (`lacs) 2,000 4,000
No. of shares outstanding (lacs) 200 1,000
PE ratio (times) 10 5
Required:
a. What is the swap ratio based on the current market prices?
b. What is the EPS of Mani ltd. after the acquisition?
c. What is the expected market price per share of Mani Ltd. after the
acquisition, assuming its PE ratio is adversely affected by 10%
d. Determine the market value of merged Co.
e. Calculate gain/loss for the shareholders of the two independent entities,

due to merger
--------------------------------[Jun 2009, 10 Marks] ---------------------------------

10. ABC Ltd. is considering the acquisition of XYZ ltd. Their financial data at the
time of acquisition is as follows:
ABC Ltd. XYZ Ltd.

Net Profit after tax `30,00,000 `6,00,000
No. of shares 6,00,000 2,50,000
Earnings per share `5 `2.40
Assuming that the net profit after tax of the two companies would remain the
same after amalgamation, explain the effect on EPS of the total merged
company under each of the following situations:
a. ABC ltd. offers to pay`30 per share to the shareholders of XYZ ltd.
b. ABC ltd. offers to pay `40 per share to the shareholders of XYZ ltd.
The amount in both the cases is to be paid in the form of shares of ABC Ltd.
11. P Ltd. is considering takeover of R Ltd. by the exchange of four new shares in
P Ltd. for every five shares in R Ltd. The relevant financial details of the two
companies prior to merger announcement are as follows:
P Ltd R Ltd
Profit before Tax (`Crore) 15 13.50
No. of Shares (Crore) 25 15
P/E Ratio 12 9
Corporate Tax Rate 30%
(i) Market value of both the company.
(ii) Value of original shareholders.
(iii) Price per share after merger.
(iv) Effect on share price of both the company if the Directors of P Ltd.
expect their own pre-merger P/E ratio to be applied to the combined
earnings.

CA Final SFM
12. Company X is contemplating the purchase of Company Y, Company X

3,00,000 shares having market price of `30 per share, while the Company Y
has 2,00,000 shares selling at `20 per share. The EPS are `4.00 and `2.25 for
Company X and Y respectively. Management of both companies are discussing
two alternative proposals for exchange of shares as indicated below:
i) In proportion to the relative earnings per share of two companies.
ii) 0.5 share of Company X for one share of Company Y.
a. Calculate the EPS after merger under two alternatives;
b. Show the impact of EPS for the shareholders of two companies under both
the alternatives
13. ABC Ltd. is intending to acquire XYZ Ltd. by merger and the following
information is available in respect of the companies:
ABC Ltd. XYZ Ltd.

Number of equity shares 10,00,000 6,00,000
Earnings after tax (`) 50,00,000 18,00,000
Market value per share (`) 42 28
Required:
(i) What is the present EPS of both the companies?
(ii) If the proposed merger takes place, what would be the new earning
per share for ABC Ltd.? Assume that the merger takes place by
exchange of equity shares and the exchange ratio is based on the
current market price.
(iii) What should be exchange ratio, if XYZ Ltd. wants to ensure the
earnings to members are as before the merger takes place?
----------------------------------[May 2004, 8 Marks] -----------------------------------

14. A Ltd. acquires B Ltd. Assuming that it has been ensured that after merger the
EPS shall be at least Rs. 5.33 per share and there shall be no synergies gain
from merger complete the following table:
A Ltd. B Ltd. Merged Firm

EPS Rs. 4.00 Rs. 5.00 Rs. 5.33
Price Per Share Rs. 80.00 Rs. 50.00 ?
Price Earning Ratio 20 10 ?
No. of Shares 10,00,000 20,00,000 ?

Total Market Value 8,00,00,000 10,00,00,000 ?
----------------------------------[MTP Feb, 2015] -------------------------------------
15. Cauliflower Limited is contemplating acquisition of Cabbage Limited.

Cauliflower Limited has 5 lakh shares having market value of `40 per share
while Cabbage Limited has 3 lakh shares having market value of `25 per share.
The EPS for Cabbage Limited and Cauliflower Limited are `3 per share and
`5 per share respectively. The managements of both the companies are
discussing two alternatives for exchange of shares as follows:
(i) In proportion to relative earnings per share of the two companies.
(ii) 1 share of Cauliflower Limited for two shares of Cabbage Limited.
Required:
(i) Calculate the EPS after merger under both the alternatives.
(ii) Show the impact on EPS for the shareholders of the two companies
under both the alternatives.
----------------------------------[MTP March, 2018] ----------------------------------

CA Final SFM
16. You have been provided the following financial data of two companies:
Krishna Ltd. Rama Ltd.

Profit after tax `7,00,000 `10,00,000
Equity shares outstanding (Nos.) 2,00,000 4,00,000
EPS `3.5 `2.5
PE Ratio 10 times 14 times
Company Rama Ltd. is acquiring the company Krishna Ltd. exchanging its
shares on a one-to-one basis for Company Krishna Ltd. The exchange ratio is
based on the market prices of the shares of the two companies.
Required:
i) What will be the EPS subsequent to merger?
ii) What is the change in EPS for the shareholders of companies Rama Ltd.
and Krishna Ltd.?
iii) Determine the market value of the post merger firm. PE ratio is likely to
remain the same.
iv) Ascertain the profits accruing to shareholders of both the companies.
----------------------------[Nov 2009, 10 Marks] ------------------------------------
17. Reliable Industries Ltd. (RIL) is considering a takeover of Sunflower

Industries Ltd. (SIL). The particulars of 2 companies are given below:
Particulars Reliable Industries Sunflower Industries

Ltd. Ltd.
Earnings After Tax (EAT) `20,00,000 `10,00,000
Equity share o/s 10,00,000 10,00,000
Earnings per share (EPS) `2 `1

Required:
(i) What is the market value of each Company before merger?

(ii) Assume that the management of RIL estimates that the shareholders
of SIL will accept an offer of one share of RIL for four shares of
SIL. If there are no synergic effects, what is the market value of the
Post-merger RIL? What is the new price per share? Are the
shareholders of RIL better or worse off than they were before the
merger?
(iii) Due to synergic effects, the management of RIL estimates that the
earnings will increase by 20%. What is the new post-merger EPS and
price per share? Will the shareholders be better off or worse off than
before the merger?
-----------------------------------[May 2006, 8 Marks] -------------------------------
18. B ltd. is highly successful company and wishes to expand by acquiring other
firms. Its expected high growth in earnings and dividends is reflected in its PE
ratio of 17. The board of directors of B Ltd. has been advised that if it were to
take over firms with a lower PE ratio than its own, using a share for share
exchange, then it could increase its reported earnings per share. C Ltd. has been
suggested as a possible target for a takeover, which has a PE ratio of 10 and
100000 shares in issue with a share price of `15. B Ltd. has 500000 shares in
issue with a share price of `12.
Calculate the change in earnings per share of B Ltd. if it acquires the whole of
C ltd. by issuing shares at its market price of `12. Assume the price of B Ltd.
shares remains constant.
-----------------------------------[Nov 2009, 8 Marks] ----------------------------------

CA Final SFM
19. AXE Ltd. is interested to acquire PB Ltd. AXE has 50,00,000 shares of `10
each, which are presently being quoted at `25 per share. On the other hand,
PB has 20,00,000 share of `10 each currently selling at `17. AXE and PB have
EPS of `3.20 and `2.40 respectively.
(a) Show the impact of merger on EPS, in case if exchange ratio is based on
relative proportion of EPS.
(b) Suppose, if AXE quote an offer of share exchange ratio of 1:1, then
should PB accept the offer or not, assuming that there will be no change
in PE ratio of AXE after the merger.
(c) The maximum ratio likely to acceptable to management of AXE.
----------------------------------[RTP May 2012] -------------------------------------
20. Longitude Limited is in the process of acquiring Latitude Limited on a share

exchange basis. Following relevant data are available:
Longitude Latitude
Limited Limited
Profit after tax (PAT) ` in Lakhs 140 60
Number of Shares Lakhs 15 16
Earnings per Share ` 8 5
Price Earning Ratio (P/E Ratio) 15 10
(Ignore Synergy)
i. Pre-merger Market Value per Share, and
ii. The maximum exchange ratio Longitude Limited can offer without the
dilution of:
1) EPS and
2) Market Value per Share
Calculate Ratio/s up to four decimal points and amounts and number of shares
up to two decimal points.

21. Computer Ltd. has shortlisted Calculator Ltd. for merger. Though there is no
immediate benefit, however, it is expected that in the long run, the synergies
would be available. Following information is available in respect of these
companies.
Computer Ltd. Calculator Ltd.
No. of shares 1,00,000 10,000
EPS 20 20
Market Price 250 100
Computer ltd. is to offer shares in exchange of shares of Calculator Ltd. and no

cash transaction will take place. The swap ratio is not yet finalized, however, it
may be offered on the basis of market price, total earnings, PE Ratio or 0.5:1.
Which swap ratio is most favourable from the point of respective company?
Also find out EPS of the merged entity under each of swap ratio.
22. A Ltd. acquires B Ltd. Assuming that it has been ensured that after merger the
EPS shall be at least Rs. 5.33 per share and there shall be no synergies gain
from merger complete the following table:
A Ltd. B Ltd. Merged Firm

EPS Rs. 4.00 Rs. 5.00 Rs. 5.33
Price Per Share Rs. 80.00 Rs. 50.00 ?
Price Earning Ratio 20 10 ?
No. of Shares 10,00,000 20,00,000 ?

Total Market Value 8,00,00,000 10,00,00,000 ?
----------------------------------[MTP Feb, 2015] -------------------------------------

CA Final SFM
a. Cauliflower Limited is contemplating acquisition of Cabbage Limited.

Cauliflower Limited has 5 lakh shares having market value of `40 per share
while Cabbage Limited has 3 lakh shares having market value of `25 per share.
The EPS for Cabbage Limited and Cauliflower Limited are `3 per share and
`5 per share respectively. The managements of both the companies are
discussing two alternatives for exchange of shares as follows:
a. In proportion to relative earnings per share of the two companies.
b. 1 share of Cauliflower Limited for two shares of Cabbage Limited.
Required:
1. Calculate the EPS after merger under both the alternatives.
2. Show the impact on EPS for the shareholders of the two companies
under both the alternatives.
----------------------------------[MTP March, 2018] ------------------------------------
24. XYZ Ltd. wants to purchase ABC Ltd. by exchanging 0.7 of its share for each
share of ABC Ltd. Relevant financial data are as follows:
Equity shares outstanding 10,00,000 4,00,000
EPS (`) 40 28
Market price per share (`) 250 160
(i) Illustrate the impact of merger on EPS of both the companies.
(ii) The management of ABC Ltd. has quoted a share exchange ratio of
1:1 for the merger. Assuming that P/E ratio of XYZ Ltd. will remain
unchanged after the merger, what will be the gain from merger for
ABC Ltd.?
(iii) What will be the gain/loss to shareholders of XYZ Ltd.?
(iv) Determine the maximum exchange ratio acceptable to shareholders of
XYZ Ltd.
----------------------------------[Nov 2015, 10 Marks] ---------------------------------

25. C Ltd. & D Ltd. are contemplating a merger deal in which C Ltd. will acquire
D Ltd. The relevant information about the firms are given as follows:
C Ltd. D Ltd.
Total Earnings (E) (in millions) `96 `30
Number of outstanding shares (S) 20 14
(in millions)
Earnings per share (EPS) (`) 4.8 2.143
Price earnings ratio (P/E) 8 7
Market Price per share (P) (`) 38.4 15
(i) What is the maximum exchange ratio acceptable to the shareholders of
C Ltd., if the P/E ratio of the combined firm is 7?
(ii) What is the minimum exchange ratio acceptable to the shareholders of
D Ltd., if the P/E ratio of the combined firm is 9?
-------------------------------[Nov 2018, 10 Marks] -------------------------------
26. A Ltd. (Acquirer company’s) equity capital is `2,00,00,000. Both A ltd. and
T Ltd. (Target Company) have arrived at an understanding to maintain debt
equity ratio at 0.30:1 of the merged company. Pre-merger debt outstanding of
A Ltd. stood at `20,00,000 and T ltd. at `10,00,000 and marketable securities
of both companies stood at `40,00,000.
You are required to determine whether liquidity of merged company shall

remain comfortable if A ltd. acquires T Ltd. against cash payment at mutually
agreed price of `65,00,000.
------------------------------------[RTP May 2015]---------------------------------------

CA Final SFM
27. R Ltd. and S Ltd. are companies that operate in the same industry. The financial
statements of both the companies for the current financial year are as follows:
Balance Sheet
Particulars R. Ltd. (`) S. Ltd (`)
Equity & Liabilities
Shareholders Fund
Equity Capital (`10 each) 20,00,000 16,00,000
Retained earnings 4,00,000 -
Non-current Liabilities 10,00,000 6,00,000
Current Liabilities 14,00,000 8,00,000
48,00,000 30,00,000
Total Assets
Non-current Assets 20,00,000 10,00,000
Current Assets 28,00,000 20,00,000
Total 48,00,000 30,00,000
Income Statement
Particulars R. Ltd. (`) S. Ltd. (`)
A. Net Sales 69,00,000 34,00,000
B. Cost of Goods sold 55,20,000 27,20,000
C. Gross Profit (A-B) 13,80,000 6,80,00
D. Operating Expenses 4,00,000 2,00,000
E. Interest 1,60,000 96,000
F. Earnings before taxes [C-(D+E)] 8,20,000 3,84,000
G. Taxes @ 35% 2,87,000 1,34,400
H. Earnings After Tax (EAT) 5,33,000 2,49,600

No. of equity shares 2,00,000 1,60,000
Dividend payment Ratio (D/P) 20% 30%
Assume that both companies are in the process of negotiating a merger
through exchange of Equity shares:
(i) Decompose the share price of both the companies into EPS & P/E
components. Also segregate their EPS figures into Return On Equity
(ROE) and Book Value/Intrinsic Value per share components.
(ii) Estimate future EPS growth rates for both the companies.
(iii) Based on expected operating synergies, R Ltd. estimated that the
intrinsic value of S Ltd. Equity share would be `25 per share on its
acquisition. You are required to develop a range of justifiable Equity
Share Exchange ratios that can be offered by R Ltd. to the
shareholders of S Ltd.
Based on your analysis on parts (i) and (ii), would you expect the
negotiated terms to be closer to the upper or the lower exchange ratio
limits and why?
-----------------------------[May 2015, 8 Marks] ------------------------------------

CA Final SFM
28. BA Ltd. and DA Ltd. both the companies operate in the same industry. The
Financial statements of both the companies for the current financial year are
as follows:
Balance Sheet BA Ltd. (`) DA Ltd. (`)

Current Assets 14,00,000 10,00,000
Fixed Assets (Net) 10,00,000 5,00,000
Total 24,00,000 15,00,000
Equity capital (`10 each) 10,00,000 8,00,000
Retained earnings 2,00,000 --
14% long-term debt 5,00,000 3,00,000
Current liabilities 7,00,000 4,00,000
Total 24,00,000 15,00,000
Income Statement BA Ltd. (`) DA Ltd. (`)
Net Sales 34,50,000 17,00,000
Cost of Goods sold 27,60,000 13,60,000
Gross profit 6,90,000 3,40,000
Operating expenses 2,00,000 1,00,000
Interest 70,000 42,000
Earnings before taxes 4,20,000 1,98,00
Taxes @ 50% 2,10,000 99,000
Earnings after taxes (EAT) 2,10,000 99,000
No. of Equity shares 1,00,000 80,000
Dividend payment ratio (D/P) 40% 60%
Assume that both companies are in the process of negotiating a merger through
an exchange of equity shares. You have been asked to assist in establishing
equitable exchange terms and are required to:

a. Decompose the share price of both the companies into EPS and P/E
components; and also segregate their EPS figures into Return on
Equity (ROE) and book value/intrinsic value per share components.
b. Estimate future EPS growth rates for each company.
c. Based on expected operating synergies BA Ltd. estimates that the

intrinsic value of DA’s equity share would be `20 per share on its
acquisition. You are required to develop a range of justifiable equity
share exchange ratios that can be offered by BA Ltd. to the shareholders
of DA Ltd. Based on your analysis in part (i) and (ii), would you expect
the negotiated terms to be closer to the upper, or the lower exchange
ratio limits and why?
d. Calculate the post-merger EPS based on an exchange ratio of 0.4:1

being offered by BA Ltd. Indicate the immediate EPS accretion or
dilution, if any, that will occur for each group of shareholders.
e. Based on a 0.4:1 exchange ratio and assuming that BA Ltd.’s pre-

merger P/E ratio will continue after the merger, estimate the post-
merger market price. Also show the resulting accretion or dilution in
pre-merger market prices.
---------------[Nov 2008, 20 Marks, MTP Oct 2018, 8 Marks] ----------------
29. The following information relating to the acquiring Company Abhishek Ltd.
and the target Company Abhiman Ltd. are available. Both the Companies are
promoted by Multinational Company, Trident Ltd. The promoter’s holding is
50% and 60% respectively in Abhishek Ltd. and Abhiman Ltd.:
Abhishek Ltd. Abhiman Ltd.

Share Capital (`) 200 lacs 100 lacs
Free reserves and surplus (`) 800 lacs 500 lacs
Paid up value per share (`) 100 10
Free float market capitalization (`) 400 lacs 128 lacs

CA Final SFM
Trident Ltd. is interested to do justice to the shareholders of both the

Companies. For the swap ratio weights are assigned to different parameters by
the Board of Directors as follows:
Book Value 25%
EPS 50%
Market Price 25%
a) What is the swap ratio based on above weights?
b) What is the book value, EPS and expected market price of Abhishek Ltd.
after acquisition of Abhiman Ltd. (assuming PE ratio of Abhishek Ltd.
remains unchanged and all assets and liabilities of Abhiman Ltd. are taken
over at book value)?
c) Calculate:
1. Promoter’s revised holding in the Abhishek Ltd.
2. Free float market capitalization.
3. Also calculate No. of Shares, Earnings per Share (EPS) and Book
Value (B.V.), if after acquisition of Abhiman Ltd., Abhishek Ltd.
decided to:
(a) Issue Bonus shares in the ratio of 1:2; and
(b) Split the stock (share) as `5 each fully paid.
-------------[Jun 2009, 20 Marks]---------------[May 2011, 8 Marks]------------
30. The following information is provided relating to the acquiring company

Efficient Ltd. and the target Company Healthy Ltd.
Efficient Ltd. Healthy

No. of shares (F.V. `10 each) 10.00 lakhs Ltd.
7.5 lakhs
Market capitalization (`) 500.00 lakhs 750.00 lakhs
P/E ratio (times) 10.00 5.00
Reserves and Surplus (`) 300.00 lakhs 165.00 lakhs
Promoter’s Holding (No. of 4.75 lakhs 5.00 lakhs
shares)

Board of Directors of both the Companies have decided to give a fair deal to
the shareholders and accordingly for swap ratio the weights are decided as
40%, 25% and 35% respectively for Earning, Book Value and Market Price
of share of each company:
(i) Calculate the swap ratio and also calculate Promoter’s holding %
after acquisition.
(ii) What is the EPS of Efficient Ltd. after acquisition of Healthy Ltd.?
(iii) What is the expected market price per share and market
capitalization of Efficient Ltd. after acquisition, assuming P/E ratio
of Firm Efficient Ltd. remains unchanged.
(iv) Calculate free float market capitalization of the merged firm.
------------------------------[Nov 2005, 12 Marks] ---------------------------------
31. The following information is provided relating to the acquiring company E

Ltd., and the target company H Ltd:
Particulars E Ltd. (`) H Ltd. (`)

Number of shares (Face value `10 each) 20 Lakhs 15 Lakhs
Market Capitalization 1000 Lakhs 1500 Lakhs
P/E Ratio (times) 10.00 5.00
Reserves and surplus in ` 600.00 Lakhs 330.00 Lakhs
Promoter's Holding (No. of shares) 9.50 Lakhs 10.00 Lakhs
The Board of Directors of both the companies have decided to give a fair deal
to the shareholders. Accordingly, the weights are decided as 40%, 25% and
35% respectively for earnings, book value and market price of share of each
company for swap ratio.

CA Final SFM
Calculate the following:

(i) Market price per share, earnings per share and Book Value per share;
(ii) Swap ratio;
(iii) Promoter's holding percentage after acquisition;
(iv) EPS of E Ltd. after acquisitions of H Ltd;
(v) Expected market price per share and market capitalization of E Ltd.;
after acquisition, assuming P/E ratio of E Ltd. remains unchanged; and
(vi) Free float market capitalization of the merged firm.
--------------------------------[Nov 2015, 10 Marks] --------------------------------
32. T Ltd. and E Ltd. are in the same industry. The former is in negotiation for
acquisition of the latter. Important information about the two companies as per
their latest financial statements is given below:
T Ltd. E Ltd.
`10 Equity shares outstanding 12 lakhs 6 lakhs
Debt:
10% Debentures (` in lakhs) 580 __
12.5% institutional loan (` in lakhs) __ 240
EBIDT (` in lakhs) 400.86 115.71
Market price / share (`) 220 110
T Ltd. plans to offer a price for E Ltd. business as a whole which will be 7 times
EBIDT reduced by outstanding debt to be discharged by own shares at market
price.
E Ltd. is planning to seek one share in T Ltd. for every 2 shares in E Ltd. based
on the market price. Tax rate for the two companies may be assumed as 30%
Calculate and show the following under both alternatives – T Ltd.’s offer and
E Ltd.’s plan:

a. Net consideration payable
b. No. of shares to be issued by T Ltd
c. EPS of T Ltd. after acquisition
d. Expected market price per share of T Ltd. after acquisition.
e. State briefly the advantage to T Ltd. from the acquisition.
Calculations (except EPS) may be rounded off to 2 decimals in lakhs.
-------------------[RTP May 2018, MTP Oct 2018, 8 Marks] ---------------------
33. TK Ltd. and SK Ltd. are in the same industry. The former is in negotiation for
acquisition of the latter. Important information about the two companies as per
their latest financial statements is given below:
TK Ltd. SK Ltd.
`10 Equity shares outstanding 24 lakhs 12 lakhs
Debt:
10% Debentures (` in lakhs) 1160 __
12.5% institutional loan (` in lakhs) __ 480
EBIDT (` in lakhs) 800.00 230.00
Market price / share (`) 220.00 110.00
TK Ltd. plans to offer a price for SK Ltd. business as a whole which will be 7
times EBIDT reduced by outstanding debt and to be discharged by own shares
at market price.
SK Ltd. is planning to seek one share in TK Ltd. for every 2 shares in E Ltd.
based on the market price. Tax rate for the two companies may be assumed as
30%. Calculate and show the following under both alternatives – TK Ltd.’s
offer and SK Ltd.’s plan:

CA Final SFM
(i) Net consideration payable

(ii) No. of shares to be issued by TK Ltd
(iii) EPS of TK Ltd. after acquisition
(iv) Expected market price per share of TK Ltd. after acquisition.
(v) State briefly the advantage to TK Ltd. from the acquisition.
Calculations may be rounded off to two decimal points.
----------------------------------[Nov 2018, 12 Marks] ---------------------------------
34. Abhishek Ltd. has a surplus cash of `90 lakhs and wants to distribute 30% of
it to the shareholders. The Company decides to buy back shares. The Finance
Manager of the Company estimates that its share price after re-purchase is
likely to be 10% above the buyback price; if the buyback route is taken. The
number of shares outstanding at present is 10 lakhs and the current EPS is `3.
a. The price at which the shares can be repurchased, if the market

capitalization of the company should be `200 lakhs after buyback.
b. The number of shares that can be re-purchased.
c. The impact of share re-purchase on the EPS, assuming the net income is
same.
------------------------------[May 2006, 6 Marks] ------------------------------------
35. Two companies Bull Ltd. and Bear Ltd. recently have been merged. The
merger initiative has been taken by Bull Ltd. to achieve a lower risk profile for
the combined firm in spite of fact that both companies belong to different
industries and disclose a little co- movement in their profit earning streams.
Though there is likely to synergy benefits to the tune of `7 crore from proposed
merger. Further both companies are equity financed and other details are as
follows:

Market Cap Beta

Bull Ltd. 1000 Crores 1.50
Bear Ltd. 500 Crores 0.60
Expected Market Return and Risk Free Rate of Return are 13% and 8%
respectively. Shares of merged entity have been distributed in the ratio of 2:1
i.e. market capitalization just before merger.
(b) Calculate return on shares of both companies before merger and after
merger.
(c) Calculate the impact of merger on Mr. X, a shareholder holding 4%
shares in Bull Ltd. and 2% share of Bear Ltd.
----------------------------------[RTP Nov 2015] ------------------------------------
36. Bidder Ltd has a cost of capital of 20% and is expected to have annual earnings
of `12,00,000 forever. The strategic planning department of the company has
identified Target Ltd. as a suitable takeover target. It is estimated that the post
merger earnings would be `14,00,000 p.a. in perpetuity.
The capital project department of Bidders Ltd. has estimated that it should pay
`27,50,000 to acquire Target Ltd. Find out the cost of capital that capital
budgeting department must have estimated for the combined operations.
37. Elrond Limited plans to acquire Doom Limited. The relevant financial details
of the two firms prior to the merger announcement are:
Elrond Limited Doom Limited

Market Price Per Share `50 `25
No. of shares outstanding 20 lakhs 10 lakhs
The merger is expected to generate gains, which have a present value of `200
lakhs. The exchange ratio agreed to is 0.5.
What is the true cost of the merger from the point of view of Elrond Limited?
----------------------------------[Nov 2015, 5 Marks] -----------------------------------

CA Final SFM
38. The following information is relating to Fortune India Ltd. having two
division, viz. Pharma Division and Fast Moving Consumer Goods Division
(FMCG Division). Paid up share capital of Fortune India Ltd. is consisting
of 3,000 Lakhs equity shares of Re. 1 each. Fortune India Ltd. decided to de-
merge Pharma Division as Fortune Pharma Ltd. w.e.f. 1.4.2009. Details of
Fortune India Ltd. as on 31.3.2009 and of Fortune Pharma Ltd. as on
1.4.2009 are given below:
Particulars Fortune Pharma(`) Fortune India(`)

Outside Liabilities
Secured Loans 400 Ltd.
lakh 3,000 Ltd.
lakh
Unsecured Loans 2,400 lakh 800 lakh
Current Liabilities& Provisions 1,300 lakh 21,200 lakh
Assets
Fixed Assets 7,740 lakh 20,400 lakh
Investments 7,600 lakh 12,300 lakh
Current Assets 8,800 lakh 30,200 lakh
Loans& Advances 900 lakh 7,300 lakh
Deferred tax/Misc. Expenses 60 lakh (200) lakh
Board of Directors of the Company have decided to issue necessary equity

shares of Fortune Pharma Ltd. of Re. 1 each, without any consideration to
the shareholders of Fortune India Ltd. For that purpose following points are
to be considered:
1. Transfer of Liabilities & Assets at Book value.
2. Estimated Profit for the year 2009-10 is `11,400 Lakh for Fortune India
Ltd. & `1,470 lakhs for Fortune Pharma Ltd.
3. Estimated Market Price of Fortune Pharma Ltd. is `24.50 per share.
4. Average P/E Ratio of FMCG sector is 42 &Pharma sector is 25, which

is to be expected for both the companies.
Calculate:
1. The Ratio in which shares of Fortune Pharma are to be issued to the
shareholders of Fortune India Ltd.

2. Expected Market price of Fortune India (FMCG) Ltd.
3. Book Value per share of both the Companies immediately after

Demerger.
-----------------------------[Nov 2005, 8 Marks] -------------------------------------
39. M/s Tiger Ltd. wants to acquire M/s Leopard Ltd. The balance sheet of
Leopard as on 31st March,2012 is as follows
Liabilities ` Assets `
Equity Capital 7,00,000 Cash 50,000
(70,000 shares)
Retained Earnings 3,00,000 Debtors 70,000
12% Debentures 3,00,000 Inventories 2,00,000
Creditors and other 3,20,000 Plans and 13,00,000
liabilities Equipment
16,20,000 16,20,000
Additional Information
i. Shareholders of Leopard Ltd. will get one share in Tiger Ltd. for every
two shares. External liabilities are expected to be settled at `5,00,000.
Shares of Tiger Ltd. would be issued at its current price of `15 per share.
Debenture holders will get 13% convertible debentures in the purchasing
company for the same amount. Debtors and inventories are expected to
realize `2,00,000.
ii. Tiger Ltd. has decided to operate the business of Leopard Ltd. as a
separate division. The division is likely to give cash flows (after tax) to
the extent of `5,00,000 per year for 6 years. Tiger Ltd. has planned that,
after 6 years, this division would be demerged and disposed of for
`2,00,000

CA Final SFM
iii. The company’s cost of capital is 16%.
iv. Make a report to the board of the company adivising them about the
financial feasibility of this acquisition.
-------------------------------[Nov 2013, 10 Marks] ------------------------------
40. The following is the Balance-sheet of Grape Fruit Company Ltd as at March
31st, 2011.
Liabilities ` In lakhs Assets `In lakhs

Equity shares of `100 each 600 Land and Building 200
14% preference shares of 200 Plant and machinery 300
`100 each
13% Debentures 200 Furniture and Fixtures 50
Debentures interest accrued 26 Inventory 150
and payable
Loan from bank 74 Sundry Debtors 70
Trade Creditors 340 Cash at bank 130
Preliminary Expenses 10
Cost of issue of 5
debentures
Profit and Loss 525
account
1440 1440
The Company did not perform well and has suffered sizable losses during the
last few years.
However, it is felt that the company could be nursed back to health by proper
financial restructuring. Consequently, the following scheme of reconstruction
has been drawn up:
a. Equity shares are to be reduced to `25/- per share, fully paid up;
b. Preference shares are to be reduced (with coupon rate of 10%) to equal
number of shares of `50 each, fully paid up.

c. Debenture holders have agreed to forgo the accrued interest due to them.
In the future, the rate of interest on debentures is to be reduced to 9
percent.
d. Trade creditors will forego 25 percent of the amount due to them.
e. The company issues 6 lakh of equity shares at `25 each and the entire
sum was to be paid on application. The entire amount was fully
subscribed by promoters.
f. Land and Building was to be revalued at `450 lakhs, Plant and
Machinery was to be written down by `120 lakhs and a provision of `15
lakhs had to be made for bad and doubtful debts.
Required:
i. Show the impact of financial restructuring on the company’s activities.
ii. Prepare the fresh balance sheet after the reconstructions is completed on
the basis of the above proposals.
----------------------------------[RTP Nov 2014] -----------------------------------
41. The following is the Balance-sheet of XYZ Company Ltd as on March 31st,
2013.
6 lakh equity shares of 600 Land & Building 200
`100/- each
2 lakh 14% Preference 200 Plant & Machinery 300
shares of `100/- each
13% Debentures 200 Furniture & Fixtures 50
Debenture Interest accrued 26 Inventory 150
and Payable
Loan from Bank 74 Sundry debtors 70
Trade Creditors 300 Cash-at-Bank 130
Preliminary Expenses 10
Cost of Issue of 5
debentures
Profit & Loss A/c 485

CA Final SFM
The XYZ Company did not perform well and has suffered sizable losses during
the last few years. However, it is now felt that the company can be nursed back
to health by proper financial restructuring and consequently the following
scheme of reconstruction has been devised:
(i) Equity shares are to be reduced to `25/- per share, fully paid up;
(ii) Preference shares are to be reduced (with coupon rate of 10%) to equal
number of shares of `50 each, fully paid up.
(iii) Debenture holders have agreed to forego interest accrued to them.
Beside this, they have agreed to accept new debentures carrying a
coupon rate of 9%.
(iv) Trade creditors have agreed to forgo 25 per cent of their existing claim;
for the balance sum they have agreed to convert their claims into equity
shares of `25/- each.
(v) In order to make payment for bank loan and augment the working
capital, the company issues 6 lakh equity shares at `25/- each; the entire
sum is required to be paid on application. The existing shareholders have
agreed to subscribe to the new issue.
(vi) While Land and Building is to be revalued at `250 lakh, Plant &
Machinery is to be written down to `104 lakh. A provision amounting
to `5 lakh is to be made for bad and doubtful debts.
You are required to show the impact of financial restructuring/re-
construction. Also, prepare the new balance sheet assuming the scheme of re-
construction is implemented in letter and spirit.
----------------------------------[May 2017, 8 Marks] -------------------------------

42. The Nishan Ltd. has 35,000 shares of equity stock outstanding with a book
value of `20 per share. It owes debt `15,00,000 at an interest rate of 12%.
Selected financial results are as follows.
Income & Cash Flow Capital

EBIT 80,000 Debt 15,00,000
Interest 1,80,000 Equity 7,00,000
EBT (1,00,000)
Tax 0
EAT (1,00,000)
Depreciation 50,000
Principal Repayment (75,000)
Cash Flow (1,25,000)
Restructure the financial line items shown assuming a composition in which
creditors agree to convert two thirds of their debt into equity at book value.
Assume Nishan will pay tax at a rate of 15% on income after the restructuring,
and that principal repayments are reduced proportionately with debt. Who will
control the company and by how big a margin after the restructuring?
------------------------------[MTP Mar 2019, 8 Marks] ---------------------------
43. Simpson Ltd. is considering merger with Wilson Ltd. The data below are in the
hands of board of directors of both the companies. The issue at present is how
many shares of Simpson should be exchanged for Wilson Ltd. Both boards are
considering three possibilities 20,000, 25,000, 30,000 shares. You are required
to construct a table demonstrating the potential impact of each scheme on each
set of shareholders.
Simpson Wilson Combined Post
Ltd. Ltd merger Firm ‘A’
Current earnings per year 2,00,000 1,00,000 3,50,000
Shares outstanding 50,000 10,000 ?
Earnings per share `4 `10 ?

CA Final SFM
Price per share `40 `100 ?

Price-earning ratio `10 `10 `10
Value of the firm `20,00,000 `10,00,000 `35,00,000
---------------------------------[RTP May 2016] ------------------------------------
44. The equity shares of XYZ Ltd. are currently being traded at `24 per share in
the market. XYZ Ltd. has total 10,00,000 equity shares outstanding in number,
and promoters equity holding in the company is 40%.
PQR Ltd. wishes to acquire XYZ Ltd. because of likely synergies. The
estimated present value of these synergies is `80,00,000.
Further PQR feels that management of XYZ ltd. has been over paid. With
better motivation, lower salaries and fewer perks for the top management, will
lead to savings of `4,00,000 p.a. Top management with their families are
promoters of XYZ Ltd. present value of these savings would add `30,00,000
in values to the acquisition.
Following additional information is available regarding PQR Ltd.

Earnings Per share `4
Total number of equity shares outstanding 15,00,000
Market price of equity share `40
Required
1. What is the maximum price per equity share which PQR Ltd. can offer
to pay for XYZ Ltd.?
2. What is the minimum price per equity share at which the management
of XYZ Ltd. will be willing to offer their controlling interest?
---------------------------------[May 2014, 6 Marks] -------------------------------

45. M plc and C plc operating in same industry are not experiencing any rapid
growth but providing a steady stream of earnings. M plc’s management is
interested in acquisition of C plc due to its excess plant capacity. Share of C
Plc is trading in market at £4 each. Other data relating to C plc is as follows:
Particulars M Plc C Plc Combined

Entity
Profit after tax £4,800,000 £3,000,000 £9,200,000
Residual Net Cash Flow per year £6,000,000 £4,000,000 £12,000,000
Required return on Equity 12.5% 11.25% 12.00%
Balance Sheet of C plc
Assets Amount (£) Liabilities Amount (£)
Current Assets 27,300,000 Current Liabilities 13,450,000
Other Assets 5,500,000 Long Term Liabilities 11,100,000
Property Plants 21,500,000 Reserve & Surplus 24,750,000
and Equipments
Share Capital 5,000,000
54,300,000 54,300,000
You are required to compute:
(i) Minimum price per share C plc should accept from M plc
(ii) Maximum price per share M Plc shall be willing to offer to C Plc
(iii) Floor value of per share of C plc whether it shall play any role in
decision for its acquisition by M Plc.
------------------------------------[RTP May 2015] ------------------------------------
46. R Ltd. and S Ltd. operating in same industry are not experiencing any rapid
growth but providing a steady stream of earnings. R Ltd.'s management is
interested in acquisition of S Ltd.· due to its excess plant capacity. Share of S
Ltd. is trading in market at 3.20 each. Other data relating to S Ltd. is as follows

CA Final SFM
Balance Sheet of S Ltd.

Liabilities , ,Amount (`) Amount (`)
Current Liabilities 1,59,80,000 Current Assets 2,48,75,000

Other Assets
Long Term 1,28,00,000 Property Plants 94,00,000
Liabilities & Equipment
Reserves & surplus 2,79,95,000 3,45,00,000
Share Capital 1,20,00,000

(80 Lakhs shares
of `l.5 each)
Total 6,87,75,000 Total 6,87,75,000
Particulars R.Ltd. (`) S Ltd. (`) Combined

Entity (`)
Profit after Tax 86,50,0oq 49,72,000 1,21,85,000

Residual Net Cash Flows per 90,10,000 54,87,000 1,85,00,000
year
Required return on equity 13:75% 13.05% 12.5%
You are required to compute the following :
(i) Minimum price per share S Ltd. should accept from R Ltd.
(ii) Maximum price per share R Ltd: shall be willing to offer to S Ltd.
(iii) Floor Value of per share of S Ltd., whether it shall play any role in
decision for its acquisition by R Ltd.
----------------------------------[May 2019, 9 Marks] --------------------------------
47. Teer Ltd. is considering acquisition of Nishana Ltd. CFO of Teer Ltd. is of
opinion that Nishana Ltd. will be able to generate operating cash flows (after
deducting necessary capital expenditure) of `10 crore per annum for 5 years.
The following additional information was not considered in the above
estimations.

(i) Office premises of Nishana Ltd. can be disposed of and its staff can be
relocated in Teer Ltd.'s office not impacting the operating cash flows
of either businesses. However, this action will generate an immediate
capital gain of `20 crore.
(ii) Synergy Gain of `2 crore per annum is expected to be accrued from the
proposed acquisition.
(iii) Nishana Ltd. has outstanding Debentures having a market value of `15
crore. It has no other debts.
(iv) It is also estimated that after 5 years if necessary, Nishana Ltd. can also
be disposed of for an amount equal to five times its operating annual
cash flow.
Calculate the maximum price to be paid for Nishana Ltd. if cost of capital of
Teer Ltd. is 20%. Ignore any type of taxation.
----------------------------------[RTP Nov 2017] --------------------------------------
48. Bank 'R' was established in 2005 and doing banking in India. The bank is
facing DO OR DIE situation. There are problems of Gross NPA (Non
Performing Assets) at 40% & CAR/CRAR (Capital Adequacy Ratio/ Capital
Risk Weight Asset Ratio) at 4%. The net worth of the bank is not good. Shares
are not traded regularly. Last week, it was traded @ `8 per share.
RBI Audit suggested that bank has either to liquidate or to merge with other
bank.
Bank 'P' is professionally managed bank with low gross NPA of 5%.It has Net
NPA as 0% and CAR at 16%. Its share is quoted in the market @ `128 per
share. The board of directors of bank 'P' has submitted a proposal to RBI for
take over of bank 'R' on the basis of share exchange ratio.

CA Final SFM
The Balance Sheet details of both the banks are as follows:

Rs. In Lacs
Bank R Bank P
Paid up share capital 140 500
Reserves and Surplus 70 5500
Deposits 4000 40,000
Other Liabilities 890 2,500
Total Liabilities 5100 48500
Cash in Hand with RBI 400 2500
Balance with other Banks - 2000
Investments 1100 15000
Advances 3500 27000
Other Assets 100 2000
Total Assets 5100 48500
It was decided to issue shares at Book Value of Bank 'P' to the shareholders of
Bank 'R'. All assets and liabilities are to be taken over at Book Value.
For the swap ratio, weights assigned to different parameters are as follows:
Gross NPA 30%
CAR 20%
Market Price 40%
Book Value 10%
(a) What is the swap ratio based on above weights?
(b) How many shares are to be issued?
(c) Prepare Balance Sheet after merger.
(d) Calculate CAR & Gross NPA % of Bank 'P' after merger.
---------------------------------[May 2015, 11 Marks] ---------------------------------

49. During the audit of the Weak Bank (W), RBI has suggested that the Bank
should either merge with another bank or may close down. Strong Bank (S)
has submitted a proposal of merger of Weak Bank with itself. The relevant
information and Balance Sheets of both the companies are as under:
Particulars Weak Strong Assigned

Bank (W) Bank (S) Weights
(%)
Gross NPA (%) 40 5 30
Capital Adequacy Ratio 5 16 28
(CAR/Capital Risk Weight Asset
Ratio
Market price per Share (MPS) 12 96 32
Book value 10
Trading on Stock Exchange Irregular Frequent
Balance Sheet (`in Lakhs)
Particulars Weak Bank (W) Strong Bank(S)

Paid up Share Capital (`10 per share) 150 500
Reserves & Surplus 80 5,500
Deposits 4,000 44,000
Total Liabilities 5,120 52,500
Cash in Hand & with RBI 400 2,500
Balance with Other Banks 2,000
Investments 1,100 19,000
Advances 3,500 27,000
Other Assets 70 2,000
Preliminary Expenses 50 -
Total Assets 5,120 52,500

CA Final SFM
You are required to

(a) Calculate Swap ratio based on the above weights:
(b) Ascertain the number of Shares to be issued to Weak Bank;
(c) Prepare Balance Sheet after merger; and
(d) Calculate CAR and Gross NPA of Strong Bank after merger.
----------------------------------[May 2018, 12 Marks] --------------------------------
50. XML bank was established in 2001 and doing banking business in India. The
bank is facing very critical situation. There are problems of Gross NPA (Non-
Performing Assets) at 40% & CAR/CRAR (Capital Adequacy Ratio/Capital.
Risk Weight Asset Ratio) at 2%. The net worth of the bank is not good. Shares
are not traded regularly. Last week, it was traded @ `4 per share.
RBI Audit suggested that bank has either to liquidate or to merge with other
bank.
ZML Bank is professionally managed bank with low gross NPA of 5%. It has
net NPA as 0% and CAR at 16%. Its share is quoted in the market @ `64 per
share. The Board of Directors of ZML Bank has submitted a proposal to RBI
for takeover of bank XML on the basis of share exchange ratio.
The Balance Sheet details of both the banks are as follows:
Particulars XML Bank (`) ZML Bank (`)

(Amount in Crores) (Amount in Crores)
Liabilities
Paid up share capital (`10) 70 250
Reserve and Surplus 35 2,750
Deposits 2,000 20,000
Total Liabilities 2,550 24,250
Assets
Cash in hand and with RBI 200 1,250

Balance with other banks 0 1,000

Investments 550 7,500
Advances 1,750 13,500
Other Assets 50 1,000
Total Assets 2,550 24,250
It was decided to issue shares at Book Value of ZML Bank to the shareholders
of XML Bank. All Assets & Liabilities are to be taken over at Book Value.
For the Swap Ratio, weights assigned to different parameters are as follows:
Gross NPA 40%
CAR 10%
Market Price 40%
Book Value 10%
(i) Calculate swap ratio based on above rates.
(ii) Calculate number of shares are to be issued.
(iii) Prepare Balance Sheet after Merger.
----------------------------------[May 2017, 10 Marks] ------------------------------------
51. ABC, a large business house is planning to sell its wholly owned subsidiary
KLM. Another large business entity XYZ has expressed its interest in making
a bid for KLM. XYZ expects that after acquisition the annual earning of KLM
will increase by 10%. Following information, ignoring any potential synergistic
benefits arising out of possible acquisitions, are available:
(i) Profit after tax for KLM for the financial year which has just ended is
estimated to be `10 crore.
(ii) KLM's after tax profit has an increasing trend of 7% each year and the
same is expected to continue.
(iii) Estimated post tax market return is 10% and risk free rate is 4%. These
rates are expected to continue.
(iv) Corporate tax rate is 30%.

CA Final SFM
XYZ ABC Proxy entity for

KLM in the same
line of business
No. Of Shares 100 lakhs 80 Lakhs -
Current Share Price `287 `375 -
Divided Pay Out 40% 50% 50%
Debt: Equity at market values 1:2 1:3 1:4
P/E Ratio 10 13 12
Equity Beta 1 1.1 1.1
Assume gearing level of KLM to be the same as for ABC and a debt beta of
zero.
You are required to calculate:
(i) Appropriate cost of equity for KLM based on the data available for the
proxy entity.
(ii) A range of values for KLM both before and after any potential synergistic
benefits to XYZ of the acquisition.
52. XYZ, a large business house is planning to acquire ABC another business
entity in similar line of business. XYZ has expressed its interest in making a
bid for ABC. XYZ expects that after acquisition the annual earning of ABC
will increase by 10%. Following information, ignoring any potential
synergistic benefits arising out of possible acquisitions, are available:
XYZ ABC Proxy entity for XYZ
& ABC in the same
line of business
Paid up Capital (`Crore) 1025 106 --
Face Value of Share is `10
Current share price `129.60 `55 --
Debt: Equity (at market values) 1:2 1:3 1:4
Equity Beta -- -- 1.1
Assume Beta of debt to be zero and corporate tax rate as 30%, determine the
Beta of combined entity.
----------------------------------[RTP Nov 2016] -------------------------------------

53. MS Stones has different divisions of home interiors products. Recently, due to
economic slowdown, the Managing Director of the Company expressed it
desire to divestiture its ceramic tile business. The relevant financial details of
this business are as follows:
Estimated Pre Tax Cash Flow Next Year = `200 Crore
Book Value of Liabilities = `780 Crore
In an order to increase its share in the ceramic tile market, the Tripati Tiles Ltd.
showed its interest in the acquisition of this unit and offered a proceed of `950
Crore for the same to MS Stones.
The other data pertaining to the business are as follows: Tax Rate
30%
Growth Rate 4%
Applicable Discount Rate for Tile Business 12%
If market value of liabilities are `40 Crore more than book value, you are
required to advice MD whether she should go for divestiture of the tile business
or not.
----------------------------------[MTP Mar 2017] -------------------------------------
54. The CEO of a company thinks that shareholders always look for EPS.
Therefore, he considers maximization of EPS as his company's objective. His
company's current Net Profits are `80.00 lakhs and P/E multiple is 10.5. He
wants to buy another firm which has current income of `15.75 lakhs & P/E
multiple of 10.
What is the maximum exchange ratio which the CEO should offer so that he
could keep EPS at the current level, given that the current market price of both
the acquirer and the target company are `42 and `105 respectively?

CA Final SFM
If the CEO borrows funds at 15% and buys out Target Company by paying
cash, how much should he offer to maintain his EPS? Assume tax rate of 30%.
----------------------------------[RTP Nov 2018] -------------------------------------
55. XYZ Limited is considering to convert into private limited as it believes that
with the elimination of shareholders servicing costs, the company could save
`8,00,000 per annum before taxes. In addition, the company believes that
performance will be higher as a private company. As a result, annual profits are
expected to be 10% greater than present after tax profits of `90 lakhs. The
effective tax rate is 30%, the PE ratio for the share is 12 and there are 10 million
shares outstanding. What is the present market price per share? What is the
maximum rupees premium above this price that the company could pay in order
to convert the company into private limited?
----------------------------------[May 2013, 8 Marks] ---------------------------------
56. There are two companies ABC Ltd. and XYZ Ltd. are in same in industry. On order
to increase its size ABC Ltd. made a takeover bid for XYZ Ltd.
− Equity beta of ABC and XYZ is 1.2 and 1.05 respectively.
− Risk Free Rate of Return is 10% and
− Market Rate of Return is 16%.
− The growth rate of earnings after tax of ABC Ltd. in recent years has been
15% and XYZ's is 12%.
− Further both companies had continuously followed constant dividend policy.
Mr. V, the CEO of ABC requires information about how much premium above the
current market price to offer for XYZ's shares.
Two suggestions have forwarded by merchant bankers:
(i) Price based on XYZ’s net worth as per B/S, adjusted in light of current value
of assets and estimated after tax profit for the next 5 years.

(ii) Price based on Dividend Valuation Model, using existing growth rate
estimates.
Summarised Balance Sheet of both companies is as follows:
(` in lacs)
ABC XYZ ABC XYZ

Ltd. Ltd. Ltd. Ltd.
Equity Share Capital 2,000 1,000 Land & Building 5,600 1,500
General Reserves 4,000 3,000 Plant & Machinery 7,200 2,800
Share Premium 4,200 2,200 - -
- 5,200 1,000 - -
Current Liabilities Current Assets
Sundry Creditors 2,000 1,100 Accounts Receivable 3,400 2,400
Bank Overdraft 300 100 Stock 3,000 2,100
Tax Payable 1,200 400 Bank/Cash 200 400
Dividend Payable 500 400 - -
19400 9200 19400 9200
Profit & Loss A/c

(` in lacs)
ABC XYZ ABC XYZ
Ltd Ltd Ltd Ltd
To Net Interest 1200 220 By Net Profit 7000 2550
To Taxation 2030 820
To Distributable 3770 1510
Profit
7000 2550 7000 2550
To Dividend 1130 760 By 3770 1510
Distributable
Profit
To Balance c/d 2640 750
3770 1510 3770 1510

CA Final SFM
Additional information
(a) ABC Ltd.’s land & building have been recently revalued. XYZ Ltd.’s
have not been revalued for 4 years, and during this period the average
value of land & building have increased by 25% p.a.
(b) The face value of share of ABC Ltd. is `10 and of XYZ Ltd. is `25 per
share.
(c) The current market price of shares of ABC Ltd. is `310 and of XYZ
Ltd.’s `470 per share.
With the help of above data and given information you are required to calculate
the premium per share above XYZ’s current share price by two suggested
valuation methods. Discuss which of these two values should be used for
bidding the XYZ’s shares.
State the assumptions clearly, you make.
-------------------------------------[RTP Nov 2011] -------------------------------------

Chapter 15 Startup Finance
Chapter 15
Startup Finance
Q1. What is Startup Finance?
Answer:
✓ Startup financing means some initial infusion of money needed to turn
an idea (by starting a business) into reality.
✓ While starting out, big lenders like banks etc. are not interested in a
startup business.
✓ So that leaves one with the option of selling some assets, borrowing
against one’s home, asking loved ones i.e. family and friends for loans
etc.
✓ A good way to get success in the field of entrepreneurship is to speed
up initial operations as quickly as possible to get to the point where
outside investors can see and feel the business venture, as well as
understand that a person hastaken some risk reaching it to that level.
✓ Some businesses can also be bootstrapped (attempting to found and
build a company from personal finances or from the operating revenues
of the new company).
✓ In order to successfully launch a business and get it to a level where large
investors are interested in putting their money, requires a strong
business plan.
✓ It also requires seeking advice from experienced entrepreneurs and
experts -- people who might invest inthe business sometime in the
future.
Summary
(i) Initial infusion of Money
(ii) Banks are not interested
(iii) Use savings, loan from family and friends
(iv) Take some risk & speed up initial operations
(v) Bootstrap- Without any help of investors
(vi) Strong Business Plan
(vii) Seek advice from experienced people

CA Final SFM
Q2. What are the sources of funding for the Startups?

Answer
a. Personal financing. It may not seem to be innovative but you may be surprised
to note that most budding entrepreneurs never thought of saving any money
to start a business. This is important because most of the investors will not put
money into a deal if they see that you have not contributed any money from
your personal sources.
b. Personal credit lines. One qualifies for personal credit line based on one’s
personal credit efforts. Credit cards are a good example of this. However, banks
are very cautious while granting personal credit lines. They provide this facility
only when the business has enough cash flow to repay the line of credit.
c. Family and friends. These are the people who generally believe in you, without
even thinking that your idea works or not. However, the loan obligations to
friends and relatives should always be in writing as a promissory note or
otherwise.
d. Peer-to-peer lending. In this process group of people come together and lend
money to each other. Peer to peer to lending has been there for many years.
Many small and ethnic business groups having similar faith or interest generally
support each other in their start up endeavors.
Platform that offers peer to peer lending services
a. LenDen Club
b. OHMY Technologies Pvt Ltd.
c. Faircent
d. Rupaiya Exchange
e. Lendbox
f. i2ifunding.com
e. Crowdfunding. Crowdfunding is the use of small amounts of capital from a large
number of individuals to finance a new business initiative. Crowdfunding makes
use of the easy accessibility of vast networks of people through social media
and crowdfunding websites to bring investors and entrepreneurs together.
Platform that offers crowdfunding services
d. Millap d. Wishberry
e. Ketto e. Fuel A Dream
f. Impactguru f. Bitgiving

f. Microloans. Microloans are small loans that are given by individuals at a lower
interest to a new business ventures. These loans can be issued by a single
individual or aggregated across a number of individuals who each contribute a
portion of the total amount.
g. Vendor financing. Vendorfinancing is the form of financing in which a company
lends money to one of its customers so that he can buy products from the
company itself. Vendor financing also takes place when many manufacturers
and distributors are convinced to defer payment until the goods are sold. This
means extendingthe payment terms to a longer period for e.g. 30 days payment
period can be extended to 45 days or 60 days.However, this depends on one’s
credit worthiness and payment of more money.
h. Purchase order financing. The most common scaling problem faced by startups
is the inability to find a large new order. The reason is that they don’t have the
necessary cash to produce and deliver the product. Purchase order
financingcompanies often advance the required funds directly to the supplier.
This allows the transaction to complete and profit to flow up to the new
business.
i. Factoring accounts receivables. In this method, a facility is given to the seller
who has sold the good on credit to fund his receivables till the amount is fully
received. So, when the goods are sold on credit, and the credit period (i.e. the
date upto which payment shall be made) is for example 6 months, factor will
pay most of the sold amount upfrontand rest of the amount later. Therefore, in
this way, a startup can meet his day to day expenses.
Q3. Write short note on Pitch Presentation and points to be covered.

Answer:
✓ Pitch deck presentation is a short and brief presentation (not more than 20
minutes) to investors explaining about the prospects of the company and why
they should invest into the startup business.
✓ So, pitch deck presentation is a brief presentation basically using PowerPoint to
provide a quick overview of business plan and convincing the investors to put
some money into the business.
✓ Pitch presentation can be made either during face to face meetings or online
meetings with potential investors, customers, partners, and co-founders. Here,
some of the methods have been highlighted below as how to approach a pitch
presentation:

CA Final SFM
(1) Introduction
(2) Team
(3) Problem
(4) Solution
(5) Marketing
(6) Projections or Milestone
(7) Competition
(8) Business Model
(9) Financing
Q4. Write short notes on Bootstrapping

Answer
(1) An individual is said to be boot strapping when he or she attempts to found
and build a company from personal finances or from the operating revenues
of the new company.
(2) Professionals who engage in bootstrapping are known as bootstrappers.
(3) Because the business does not have to rely on other sources of funding, initial
business owners do not have to worry about diluting ownership between
investors.
(4) Compared to using venture capital, boot strapping can be beneficial, as the
entrepreneur is able to maintain control over all decisions.
(5) Methods of BootStrapping
a) Trade Credit
b) Factoring
c) Leasing
d) State tax credits and programs
e) Free and discounted resources

Q5. Write short notes on Angel Investors

Answer
✓ Angel investors invest in small startups or entrepreneurs. Often, angel
investors are among an entrepreneur's family and friends.
✓ The capital angel investors provide may be a one-time investment to help the
business propel or an ongoing injection of money to support and carry the
company through its difficult early stages.
✓ They provide more favourable terms as compared to other investors.
✓ Angel investors are focused on helping startups take their first steps, rather
than the possible profit they may get from the business.
✓ Angel investors are also called informal investors, angel funders, private
investors, seed investors or business angels.
✓ Some angel investors invest through crowdfunding platforms online or build
angel investor networks to pool in capital.
✓ Angel investors typically use their own money, unlike venture capitalists who
take care of pooled money from many other investors and place them in a
strategically managed fund.
Summary-
a) Invest in small startups or entrepreneurs.
b) One-time investment or an ongoing injection of money
c) More favourable terms
d) Focused on startups take their first steps.
e) Also called as informal investors, angel funders, private investors, seed
investors or business angels.
f) Crowdfunding platforms online or networks.
g) Use their own money, unlike venture capitalist.

CA Final SFM
Q6. What is Venture Capital Fund?

Answer:
Venture capital means funds made available for startup firms and small
businesses with exceptional growth potential. Venture capital is money
provided by professionals who alongside management invest in young, rapidly
growing companies that have the potential to develop into significant
economic contributors.
Venture Capitalists generally:
✓ Finance new and rapidly growing companies
✓ Purchase equity securities
✓ Assist in the development of new products or services
✓ Add value to the company through active participation.
Q7. What are the characteristics of venture capital fund?

Answer:
1. Long time horizon: The fund would invest with a long time horizon in
mind. Minimum period of investment would be 3 years and maximum
period can be 10 years.
2. Lack of liquidity: When VC invests, it takes into account the liquidity
factor. It assumes that there would be less liquidity on the equity it gets
and accordingly it would be investing in that format. They adjust this
liquidity premium against the price and required return.
3. High Risk: VC would not hesitate to take risk. It works on principle of high
risk and high return. So higher riskiness would not eliminate the
investment choice for a venture capital.
4. Equity Participation: Most of the time, VC would be investing in the form
of equity of a company. This would help the VC participate in the
management and help the company grow.

Q8. Explain the structure of Venture Capital funds in India

Answer:
Three main types of fund structure exist: one for domestic funds and two for
offshore ones:
a) Domestic Funds: Domestic Funds (i.e. one which raises funds
domestically) are usually structured as: i) a domestic vehicle for the
pooling of funds from the investor, and ii) a separate investment adviser
that carries those duties of asset manager. The choice of entity for the
pooling vehicle falls between a trust and a company, (India, unlike most
developed countries does not recognize a limited partnership), with the
trust form prevailing due to its operational flexibility.
b) Offshore Funds: Two common alternatives available to offshore investors
are: the “offshore structure” and the “unified structure”.
1) Offshore structure: Under this structure, an investment vehicle (an
LLC or an LP organized in a jurisdiction outside India) makes
investments directly into Indian portfolio companies. Typically, the
assets are managed by an offshore manager, while the investment
advisor in India carries out the due diligence and identifies deals.
2) Unified Structure: When domestic investors are expected to
participate in the fund, a unified structure is used. Overseas
investors pool their assets in an offshore vehicle that invests in a
locally managed trust, whereas domestic investors directly
contribute to the trust. This is later device used to make the local
portfolio investments.
Q9. What are the advantages of bringing venture capital into the company?
Answer:
✓ It injects long- term equity finance which provides a solid capital base for
future growth.
✓ The venture capitalist is a business partner, sharing both the risks and
rewards. Venture capitalists are rewarded with business success and
capital gain.

CA Final SFM
✓ The venture capitalist is able to provide practical advice and assistance to

the company based on past experience with other companies which
were in similar situations.
✓ The venture capitalist also has a network of contacts in many areas that
can add value to the company.
✓ The venture capitalist may be capable of providing additional rounds of
funding should it be required to finance growth.
✓ Venture capitalists are experienced in the process of preparing a company
for an initial public offering (IPO) of its shares onto the stock exchanges
or overseas stock exchange such as NASDAQ.
✓ They can also facilitate a trade sale.
Q10. Discuss the stages of funding in Venture Capital Finance.

Answer:
1. Seed Money: Low level financing needed to prove a new idea.
2. Start-up: Early stage firms that need funding for expenses associated with
marketing and product development.
3. First-Round: Early sales and manufacturing funds.
4. Second-Round: Working capital for early stage companies that are selling
product, but not yet turning in a profit.
5. Third Round: Also called Mezzanine financing, this is expansion money

for a newly profitable company
6. Fourth-Round: Also called bridge financing, it is intended to finance the

"going public" process

Risk in each stage is different. An indicative Risk matrix is given below:

Financial Period Risk Activity to be financed
Stage (Funds Perception
locked in
years)
Seed Money 7-10 Extreme For supporting a concept or idea
or R&D for product development
Start Up 5-9 Very High Initializing prototypes operations
or developing
First Stage 3-7 High Start commercials marketing
production and
Second Stage 3-5 Sufficiently Expand market and growing
High working capital need
Third Stage 1-3 Medium Market Expansion, Acquisition &
Product development for profit
making company
Fourth Stage 1-3 Low Facilitating public issue
Note: above figures are just indicative and not a thumb rule. Period & Risk may vary based
on the nature of startup
Q11. Discuss the venture capital investment process.

Answer:
The entire VC Investment process can be segregated into the following steps:
1. Deal Origination: VC operates directly or through intermediaries. Mainly
many practicing Chartered Accountants would work as intermediary and
through them VC gets the deal.
Before sourcing the deal, the VC would inform the intermediary or its
employees about the following so that the sourcing entity does not waste
time:
✓ Sector focus
✓ Stages of business focus
✓ Promoter focus
✓ Turn over focus

CA Final SFM
Here the company would give a detailed business plan which consists of
business model, financial plan and exit plan. All these aspects are covered
in a document which is called Investment Memorandum (IM). A tentative
valuation is also carried out in the IM.
2. Screening: Once the deal is sourced the same would be sent for screening
by the VC. The screening is generally carried out by a committee consisting
of senior level people of the VC. Once the screening happens, it would
select the company for further processing.
3. Due Diligence: The screening decision would take place based on the
information provided by the company. Once the decision is taken to
proceed further, the VC would now carry out due diligence. This is mainly
the process by which the VC would try to verify the veracity of the
documents taken. This is generally handled by external bodies, mainly
renowned consultants. The fees of due diligence are generally paid by the
VC.
However, in many case this can be shared between the investor (VC) and
Investee (the company) depending on the veracity of the document
agreement.
4. Deal Structuring: Once the case passes through the due diligence it would
now go through the deal structuring. The deal is structured in such a way
that both parties win. In many cases, the convertible structure is brought
in to ensure that the promoter retains the right to buy back the share.
Besides, in many structures to facilitate the exit, the VC may put a
condition that promoter has also to sell part of its stake along with the VC.
Such a clause is called tag- along clause.
5. Post Investment Activity: In this section, the VC nominates its nominee in

the board of the company. The company has to adhere to certain
guidelines like strong MIS, strong budgeting system, strong corporate
governance and other covenants of the VC and periodically keep the VC
updated about certain mile-stones. If milestone has not been met the
company has to give explanation to the VC. Besides, VC would also ensure
that professional management is set up in the company.

6. Exit plan: At the time of investing, the VC would ask the promoter or
company to spell out in detail the exit plan. Mainly, exit happens in two
ways: one way is ‘sell to third paty(ies)’ . This sale can be in the form of
IPO or Private Placement to other VCs. The second way to exit is that
promoter would give a buy back commitment at a pre- agreed rate
(generally between IRR of 18% to 25%). In case the exit is not happening
in the form of IPO or third party sell, the promoter would buy back. In
many deals, the promoter buyback is the first refusal method adopted i.e.
the promoter would get the first right of buyback.
Q12. What is the definition of Startup under Startup India Initiative?

Answer: (Updated definition as of 31st July 2019)
Startup means an entity, incorporated or registered in India
1. Up to 10 years from its date of incorporation
2. Incorporated as either a Private Limited Company or a Registered
Partnership Firm or a Limited Liability Partnership
3. Should have an annual turnover not exceeding Rs. 100 crore for any of the
financial years since its Incorporation
4. Entity should not have been formed by splitting up or reconstructing an
already existing business
5. Should work towards development or improvement of a product, process
or service and/or have scalable business model with high potential for
creation of wealth & employment

CA Final SFM
Q13. What is the definition of Startup under Startup India Initiative?

Answer: (this question is not covered in ICAI Syllabus)
Startups are becoming very popular in India. The government under the leadership
of PM Narendra Modi has started and promoted Startup India.
To promote growth and help Indian economy, many benefits are being given to
entrepreneurs establishing startups.
1. Simple process: Government of India has launched a mobile app and a
website for easy registration for startups. Anyone interested in setting up
a startup can fill up a simple form on the website and upload certain
documents. The entire process is completely online.
2. Reduction in cost: The government also provides lists of facilitators of
patents and trademarks. They will provide high quality Intellectual
Property Right Services including fast examination of patents at lower
fees. The government will bear all facilitator fees and the startup will bear
only the statutory fees. They will enjoy 80% reduction in cost of filing
patents.
3. Easy access to Funds: A 10,000 crore rupees fund is set-up by government
to provide funds to the startups as venture capital. The government is
also giving guarantee to the lenders to encourage banks and other
financial institutions for providing venture capital.
4. Tax holiday for 3 Years: Startups will be exempted from income tax for 3
years provided they get a certification from Inter-Ministerial Board (IMB).
5. Apply for tenders: Startups can apply for government tenders. They are
exempted from the “prior experience/turnover” criteria applicable for
normal companies answering to government tenders.
6. R&D facilities: Seven new Research Parks will be set up to provide
facilities to startups in the R&D sector
7. No time-consuming compliances: Various compliances have been
simplified for startups to save time and money. Startups shall be allowed
to self-certify compliance (through the Startup mobile app) with 9 labour
and 3 environment laws (for list of white industries which are eligible
under self-compliance – click here” )

8. Tax saving for investors: People investing their capital gains in the
venture funds setup by government will get exemption from capital gains.
This will help startups to attract more investors.
9. Choose your investor: After this plan, the startups will have an option to
choose between the VCs, giving them the liberty to choose their investors.
10. Easy exit: In case of exit – A startup can close its business within 90 days
from the date of application of winding up
11. Meet other entrepreneurs: Government has proposed to hold 2 startup
fests annually both nationally and internationally to enable the various
stakeholders of a startup to meet. This will provide huge networking
opportunities.

Area under the Standard Normal Probability Curve (Z Table)
Where,
𝑿−𝝁
𝒛=
𝝈

Natural Logarithm [ln(x), 𝒍𝒐𝒈𝒆 (x) or log(x)]
The natural logarithm ln(x) is the logarithm having base e, where e=2.718281828....
Apart from logarithms to base 10which is being normally calculated, we can also have
logarithms to base e. These are called natural logarithms
How To Use:
 You need to find the natural logarithm of Calculating Natural

2.85 Log on Calculator
 Find the row with N = 2.8
(Say ln1.3)
 Find the column 5, the number inside the
cell is 1.04732 Press
The result is 1.04732 - 2.7183
- √ 12 times
1. Now suppose you need to find natural log of 1.0667
- -1
We can calculate the same using Interpolation
formula - M+
ln(1.07) − ln(1.06) - 1.3
ln(1.0667) = ln(1.06) + 𝑥 1.0667 − 1.06
1.07 − 1.06 - √ 12 times
0.67659 − 0.58269
ln(1.0667) = 0.58269 + 𝑥 0.0067 - -1
0.01
ln(1.0667) = 0.58269 + 0.06291 - ÷
ln(1.0667) = 0.64563 - MRC
- =
N 0 1 2 3 4 5 6 7 8 9
1.0 0 0.00995 .019803 .029559 .039221 .048790 .058269 .067659 .076961 .086178
1.1 .095310 .104360 .113329 .122218 .131028 .139762 .148420 .157004 .165514 .173953
1.2 .182322 .190620 .198851 .207014 .215111 .223144 .231112 .239017 .246860 .254642
1.3 .262364 .270027 .277632 .285179 .292670 .300105 .307485 .314811 .322083 .329304
1.4 .336472 .343590 .350657 .357674 .364643 .371564 .378436 .385262 .392042 .398776
1.5 .405465 .412110 .418710 .425268 .431782 .438255 .444686 .451076 .457425 .463734
1.6 .470004 .476234 .482426 .488580 .494696 .500775 .506818 .512824 .518794 .524729
1.7 .530628 .536493 .542324 .548121 .553885 .559616 .565314 .570980 .576613 .582216
1.8 .587787 .593327 .598837 .604316 .609766 .615186 .620576 .625938 .631272 .636577
1.9 .641854 .647103 .652325 .657520 .662688 .667829 .672944 .678034 .683097 .688135
N 0 1 2 3 4 5 6 7 8 9
2.0 .693147 .698135 .703098 .708036 .712950 .717840 .722706 .727549 .732368 .737164
2.1 .741937 .746688 .751416 .756122 .760806 .765468 .770108 .774727 .779325 .783902
2.2 .788457 .792993 .797507 .802002 .806476 .810930 .815365 .819780 .824175 .828552
2.3 .832909 .837248 .841567 .845868 .850151 .854415 .858662 .862890 .867100 .871293
2.4 .875469 .879627 .883768 .887891 .891998 .896088 .900161 .904218 .908259 .912283
2.5 .916291 .920283 .924259 .928219 .932164 .936093 .940007 .943906 .947789 .951658
2.6 .955511 .959350 .963174 .966984 .970779 .974560 .978326 .982078 .985817 .989541
2.7 .993252 .996949 1.00063 1.00430 1.00796 1.01160 1.01523 1.01885 1.02245 1.02604
2.8 1.02962 1.03318 1.03674 1.04028 1.04380 1.04732 1.05082 1.05431 1.05779 1.06126
2.9 1.06471 1.06815 1.07158 1.07500 1.07841 1.08181 1.08519 1.08856 1.09192 1.09527

N 0 1 2 3 4 5 6 7 8 9
3.0 1.09861 1.10194 1.10526 1.10856 1.11186 1.11514 1.11841 1.12168 1.12493 1.12817
3.1 1.13140 1.13462 1.13783 1.14103 1.14422 1.14740 1.15057 1.15373 1.15688 1.16002
3.2 1.16315 1.16627 1.16938 1.17248 1.17557 1.17865 1.18173 1.18479 1.18784 1.19089
3.3 1.19392 1.19695 1.19996 1.20297 1.20597 1.20896 1.21194 1.21491 1.21788 1.22083
3.4 1.22378 1.22671 1.22964 1.23256 1.23547 1.23837 1.24127 1.24415 1.24703 1.24990
3.5 1.25276 1.25562 1.25846 1.26130 1.26413 1.26695 1.26976 1.27257 1.27536 1.27815
3.6 1.28093 1.28371 1.28647 1.28923 1.29198 1.29473 1.29746 1.30019 1.30291 1.30563
3.7 1.30833 1.31103 1.31372 1.31641 1.31909 1.32176 1.32442 1.32708 1.32972 1.33237
3.8 1.33500 1.33763 1.34025 1.34286 1.34547 1.34807 1.35067 1.35325 1.35584 1.35841
3.9 1.36098 1.36354 1.36609 1.36864 1.37118 1.37372 1.37624 1.37877 1.38128 1.38379
N 0 1 2 3 4 5 6 7 8 9
4.0 1.38629 1.38879 1.39128 1.39377 1.39624 1.39872 1.40118 1.40364 1.40610 1.40854
4.1 1.41099 1.41342 1.41585 1.41828 1.42070 1.42311 1.42552 1.42792 1.43031 1.43270
4.2 1.43508 1.43746 1.43984 1.44220 1.44456 1.44692 1.44927 1.45161 1.45395 1.45629
4.3 1.45862 1.46094 1.46326 1.46557 1.46787 1.47018 1.47247 1.47476 1.47705 1.47933
4.4 1.48160 1.48387 1.48614 1.48840 1.49065 1.49290 1.49515 1.49739 1.49962 1.50185
4.5 1.50408 1.50630 1.50851 1.51072 1.51293 1.51513 1.51732 1.51951 1.52170 1.52388
4.6 1.52606 1.52823 1.53039 1.53256 1.53471 1.53687 1.53902 1.54116 1.54330 1.54543
4.7 1.54756 1.54969 1.55181 1.55393 1.55604 1.55814 1.56025 1.56235 1.56444 1.56653
4.8 1.56862 1.57070 1.57277 1.57485 1.57691 1.57898 1.58104 1.58309 1.58515 1.58719
4.9 1.58924 1.59127 1.59331 1.59534 1.59737 1.59939 1.60141 1.60342 1.60543 1.60744
N 0 1 2 3 4 5 6 7 8 9
5.0 1.60944 1.61144 1.61343 1.61542 1.61741 1.61939 1.62137 1.62334 1.62531 1.62728
5.1 1.62924 1.63120 1.63315 1.63511 1.63705 1.63900 1.64094 1.64287 1.64481 1.64673
5.2 1.64866 1.65058 1.65250 1.65441 1.65632 1.65823 1.66013 1.66203 1.66393 1.66582
5.3 1.66771 1.66959 1.67147 1.67335 1.67523 1.67710 1.67896 1.68083 1.68269 1.68455
5.4 1.68640 1.68825 1.69010 1.69194 1.69378 1.69562 1.69745 1.69928 1.70111 1.70293
5.5 1.70475 1.70656 1.70838 1.71019 1.71199 1.71380 1.71560 1.71740 1.71919 1.72098
5.6 1.72277 1.72455 1.72633 1.72811 1.72988 1.73166 1.73342 1.73519 1.73695 1.73871
5.7 1.74047 1.74222 1.74397 1.74572 1.74746 1.74920 1.75094 1.75267 1.75440 1.75613
5.8 1.75786 1.75958 1.76130 1.76302 1.76473 1.76644 1.76815 1.76985 1.77156 1.77326
5.9 1.77495 1.77665 1.77834 1.78002 1.78171 1.78339 1.78507 1.78675 1.78842 1.79009
N 0 1 2 3 4 5 6 7 8 9
6.0 1.79176 1.79342 1.79509 1.79675 1.79840 1.80006 1.80171 1.80336 1.80500 1.80665
6.1 1.80829 1.80993 1.81156 1.81319 1.81482 1.81645 1.81808 1.81970 1.82132 1.82294
6.2 1.82455 1.82616 1.82777 1.82938 1.83098 1.83258 1.83418 1.83578 1.83737 1.83896
6.3 1.84055 1.84214 1.84372 1.84530 1.84688 1.84845 1.85003 1.85160 1.85317 1.85473
6.4 1.85630 1.85786 1.85942 1.86097 1.86253 1.86408 1.86563 1.86718 1.86872 1.87026
6.5 1.87180 1.87334 1.87487 1.87641 1.87794 1.87947 1.88099 1.88251 1.88403 1.88555
6.6 1.88707 1.88858 1.89010 1.89160 1.89311 1.89462 1.89612 1.89762 1.89912 1.90061
6.7 1.90211 1.90360 1.90509 1.90658 1.90806 1.90954 1.91102 1.91250 1.91398 1.91545
6.8 1.91692 1.91839 1.91986 1.92132 1.92279 1.92425 1.92571 1.92716 1.92862 1.93007
6.9 1.93152 1.93297 1.93442 1.93586 1.93730 1.93874 1.94018 1.94162 1.94305 1.94448
N 0 1 2 3 4 5 6 7 8 9
7.0 1.94591 1.94734 1.94876 1.95019 1.95161 1.95303 1.95445 1.95586 1.95727 1.95869
7.1 1.96009 1.96150 1.96291 1.96431 1.96571 1.96711 1.96851 1.96991 1.97130 1.97269
7.2 1.97408 1.97547 1.97685 1.97824 1.97962 1.98100 1.98238 1.98376 1.98513 1.98650
7.3 1.98787 1.98924 1.99061 1.99198 1.99334 1.99470 1.99606 1.99742 1.99877 2.00013
7.4 2.00148 2.00283 2.00418 2.00553 2.00687 2.00821 2.00956 2.01089 2.01223 2.01357
7.5 2.01490 2.01624 2.01757 2.01890 2.02022 2.02155 2.02287 2.02419 2.02551 2.02683
7.6 2.02815 2.02946 2.03078 2.03209 2.03340 2.03471 2.03601 2.03732 2.03862 2.03992
7.7 2.04122 2.04252 2.04381 2.04511 2.04640 2.04769 2.04898 2.05027 2.05156 2.05284
7.8 2.05412 2.05540 2.05668 2.05796 2.05924 2.06051 2.06179 2.06306 2.06433 2.06560
7.9 2.06686 2.06813 2.06939 2.07065 2.07191 2.07317 2.07443 2.07568 2.07694 2.07819

N 0 1 2 3 4 5 6 7 8 9
8.0 2.07944 2.08069 2.08194 2.08318 2.08443 2.08567 2.08691 2.08815 2.08939 2.09063
8.1 2.09186 2.09310 2.09433 2.09556 2.09679 2.09802 2.09924 2.10047 2.10169 2.10291
8.2 2.10413 2.10535 2.10657 2.10779 2.10900 2.11021 2.11142 2.11263 2.11384 2.11505
8.3 2.11626 2.11746 2.11866 2.11986 2.12106 2.12226 2.12346 2.12465 2.12585 2.12704
8.4 2.12823 2.12942 2.13061 2.13180 2.13298 2.13417 2.13535 2.13653 2.13771 2.13889
8.5 2.14007 2.14124 2.14242 2.14359 2.14476 2.14593 2.14710 2.14827 2.14943 2.15060
8.6 2.15176 2.15292 2.15409 2.15524 2.15640 2.15756 2.15871 2.15987 2.16102 2.16217
8.7 2.16332 2.16447 2.16562 2.16677 2.16791 2.16905 2.17020 2.17134 2.17248 2.17361
8.8 2.17475 2.17589 2.17702 2.17816 2.17929 2.18042 2.18155 2.18267 2.18380 2.18493
8.9 2.18605 2.18717 2.18830 2.18942 2.19054 2.19165 2.19277 2.19389 2.19500 2.19611
N 0 1 2 3 4 5 6 7 8 9
9.0 2.19722 2.19834 2.19944 2.20055 2.20166 2.20276 2.20387 2.20497 2.20607 2.20717
9.1 2.20827 2.20937 2.21047 2.21157 2.21266 2.21375 2.21485 2.21594 2.21703 2.21812
9.2 2.21920 2.22029 2.22138 2.22246 2.22354 2.22462 2.22570 2.22678 2.22786 2.22894
9.3 2.23001 2.23109 2.23216 2.23324 2.23431 2.23538 2.23645 2.23751 2.23858 2.23965
9.4 2.24071 2.24177 2.24284 2.24390 2.24496 2.24601 2.24707 2.24813 2.24918 2.25024
9.5 2.25129 2.25234 2.25339 2.25444 2.25549 2.25654 2.25759 2.25863 2.25968 2.26072
9.6 2.26176 2.26280 2.26384 2.26488 2.26592 2.26696 2.26799 2.26903 2.27006 2.27109
9.7 2.27213 2.27316 2.27419 2.27521 2.27624 2.27727 2.27829 2.27932 2.28034 2.28136
9.8 2.28238 2.28340 2.28442 2.28544 2.28646 2.28747 2.28849 2.28950 2.29051 2.29152
9.9 2.29253 2.29354 2.29455 2.29556 2.29657 2.29757 2.29858 2.29958 2.30058 2.30158
10.0 2.30259 2.30358 2.30458 2.30558 2.30658 2.30757 2.30857 2.30956 2.31055 2.31154
The natural logarithm table (Equal to or less than 1.0)

n logen n logen n logen n logen
0.01 -4.60517 0.26 -1.34707 0.51 -0.67334 0.76 -0.27443
0.02 -3.91202 0.27 -1.30933 0.52 -0.65392 0.77 -0.26136
0.03 -3.50655 0.28 -1.27296 0.53 -0.63488 0.78 -0.24846
0.04 -3.21887 0.29 -1.23788 0.54 -0.61618 0.79 -0.23572
0.05 -2.99573 0.3 -1.20397 0.55 -0.59783 0.8 -0.22314
0.06 -2.81341 0.31 -1.17118 0.56 -0.57982 0.81 -0.21072
0.07 -2.65926 0.32 -1.13943 0.57 -0.56212 0.82 -0.19845
0.08 -2.52573 0.33 -1.10866 0.58 -0.54472 0.83 -0.18633
0.09 -2.40794 0.34 -1.07881 0.59 -0.52763 0.84 -0.17435
0.1 -2.30258 0.35 -1.04982 0.6 -0.51082 0.85 -0.16252
0.11 -2.20727 0.36 -1.02165 0.61 -0.4943 0.86 -0.15082
0.12 -2.12026 0.37 -0.99425 0.62 -0.47803 0.87 -0.13926
0.13 -2.04022 0.38 -0.96758 0.63 -0.46203 0.88 -0.12783
0.14 -1.96611 0.39 -0.94161 0.64 -0.44629 0.89 -0.11653
0.15 -1.89712 0.4 -0.91629 0.65 -0.43078 0.9 -0.10536
0.16 -1.83258 0.41 -0.8916 0.66 -0.41551 0.91 -0.09431
0.17 -1.77196 0.42 -0.8675 0.67 -0.40047 0.92 -0.08338
0.18 -1.7148 0.43 -0.81419 0.68 -0.38566 0.93 -0.07257
0.19 -1.66073 0.44 -0.82098 0.69 -0.37106 0.94 -0.06187
0.2 -1.60944 0.45 -0.79851 0.7 -0.35667 0.95 -0.05129
0.21 -1.56065 0.46 -0.77653 0.71 -0.34249 0.96 -0.04082
0.22 -1.51412 0.47 -0.75502 0.72 -0.3285 0.97 -0.03046
0.23 -1.46968 0.48 -0.73397 0.73 -0.31471 0.98 -0.0202
0.24 -1.42711 0.49 -0.71335 0.74 -0.3011 0.99 -0.01005
0.25 -1.38629 0.5 -0.69214 0.75 -0.28768 1 0


International Financial Management: Q1. Discuss The Complexities Involved in International Capital Budgeting Answer

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

International Financial Management: Q1. Discuss The Complexities Involved in International Capital Budgeting Answer

Uploaded by

Copyright:

Available Formats

Chapter 12 International Financial Management

Page 266 Navkar Institute

Q2. Discuss Project vis a vis Parent Cash Flows

Evaluation of a project on the basis of own cash flows

Page 267 Navkar Institute

− The annual cash flows are discounted at a rate applicable to the

Page 268 Navkar Institute

Q4. Write a short note on Adjusted Net Present Value

− ‘Blocked Funds’ are balances held in foreign countries that cannot be

Page 269 Navkar Institute

Q6. What are the sources for international finance?

Page 270 Navkar Institute

Page 271 Navkar Institute

Q8. Write short notes on American Depository Receipts (ADRs).

Page 272 Navkar Institute

Q9. Write short notes on Global Depository Receipts (GDRs).

Page 273 Navkar Institute

Q11. What are the characteristics of GDR

Page 274 Navkar Institute

7. Investors earn fixed income by way of dividends which are paid in

Page 275 Navkar Institute

Q13. Discuss other sources of International Finance

Page 276 Navkar Institute

Page 277 Navkar Institute

Q14. Discuss the complexities involved in International Working Capital

Page 278 Navkar Institute

Q15. What are the main objectives of International Cash Management?

Q16. How the centralized cash management helps MNCs?

Page 279 Navkar Institute

Q17. Discuss the investment of excess cash or surplus by MNCs?

Page 280 Navkar Institute

Q18. Write a short note on International Inventory Management? Or What do

Page 281 Navkar Institute

Q19. Write a short note on International Receivables Management?

− the currency in which the transaction should be denominated and the

− the focus is on global allocation of firm’s resources. Different parts of the

Page 282 Navkar Institute

2. ABC Ltd. is considering a project in US, which will involve an initial

Year Cash Inflow

--------------------------------[Nov 2006, 5 Marks] -----------------------------------

Page 283 Navkar Institute

3. XY Limited is engaged in retail business in India. It is contemplating for

Estimated projected cash flows in real terms, in India as well as African

(iii) Ignore Taxation.

Page 284 Navkar Institute

4. A multinational company is planning to set up a subsidiary company in India

ADVICE X Inc. to establish the proposed project in India.

Page 285 Navkar Institute

The Spot rate of $ is `57. The inflation in India is 6% (expected to decrease by

Page 286 Navkar Institute

6. Its Entertainment Ltd., an Indian Amusement Company is happy with the

Page 287 Navkar Institute

Being a tourist Place, the amusement industry in Nepal is competitive and

Page 288 Navkar Institute

7. Opus Technologies Ltd., an Indian IT company is planning to make an

Page 289 Navkar Institute

You are required to

b) Determine whether Opus Technologies should go for the project or not

8. X Ltd. is interested in expanding its operation and planning to install

You as financial consultant is required to compute the number of GDRs to be

Page 290 Navkar Institute

Q2. What are the important terms associated with valuation?

1. The concept of present As we know that a receipt of Rs.1,000 twelve months