2ND ASSIGNMENT - M&A - IVTH SEM. EXEC.

MBA WEEKDAYS AND W

GROUP ASSIGNMENT MAXIMUM MARKS - 30

INSTRUCTIONS : last date for submission o

1YOU ARE IN THE PROCESS OF NEGOTIATION FOR AN ACQUIST

2YOU ARE GIVEN THEIR BALANCE SHEET AND PROFIT AND LOS
3YOU ARE ALSO GIVEN ASSUMPTIONS BASED ON CERTAIN DUE
4YOU HAVE A CHOICE TO MAKE ASSUMPTIONS BUT STATE THE
YOUR CONCLUSIONS.
5YOU ARE REQUIRED TO WORK OUT VALUE OF THE ENTERPRIS
3 METHODS LIKE DCF DISCOUNTED EARNINGS METHOD , BO
MARKET PRICE METHOD.
6COMMENT ON YOUR MINIMUM AND MAXIMUM OFFER AND
7COMMENT AT LEAST ON ONE ASPECT WHERE THE SELLERS O
COULD BE DEFENDED.

I TARGET COMPANY [Link] LACS

BALANCE SHEET P&L ACCOUN

LIABILITIES INCOME

CAPIT3 lac sh 30 SALES

 RESERVES 20 TOTAL

TOTAL 50 EXPENDITURE

ASSETS DIRECT EXP

FIXED ASSETS 30 EXPENSES

NET CURRENT ASSETS 20

TOTAL 50 PBT
TAX
PAT

FACE VALUE RS.10/- PER SHARE

MARKET PRICE RS.115/- PER SHARE

II TARGET COMPANY DETAILS FOR VALUATION

A DCF METHOD VALUATION CALCULATION

PROJECTIONS FOR 4 YEARS

1Turnover is expected to go up annually by 4% for 1st 2 y

2Direct expenses cost a % of sale value is expected to be
3Fixed expenses ( including depreciation ) for 1st year is
4Variable expenses including bad debts and discounts / r
 5Net current assets are generally 20% of sale value. For 3
6Working capital loan for over 20% sale value shall bear i
7Discounting rate for present value calculation is 15%
8Estimated terminal value of assets on end of 4th year is
9Calculate by DCF method value of enterprise
10 Tax rate is 25%

B BOOK VALUE METHOD OF CALCULATION

1Market value of fixed assets 1st year is Rs.40 lacs

2Contingent liability on tax disputed pending finalisation
3Current assets include bad debts of Rs.5 lacs and unreal

C MARKET VALUE METHOD 0 YEAR

1The shares were issued 2 years back and public subscrip

2The shares were issued at a premium of Rs.10/- per sha
3Annual dividend per share is Rs.1 per share
4Peer review revealed comparable PE ratio is 25 and P
5It is FTS but due to promoter holding of 60% and Institu
6RPT are nominal and at arms length
7None of the shares of the promoters are their associate
EEKDAYS AND WEEKENDS

MARKS - 30

or submission of answers - 15th April 2020

OR AN ACQUISTION OF A COMPANY
ROFIT AND LOSS ACCOUNT
N CERTAIN DUE DILIGENCE OBSERVATIONS
BUT STATE THE SAME AND HOW IT IMPACTS

THE ENTERPRISE (FULL VALUE) UNDER ALL THE

METHOD , BOOK VALUE METHOD AND

UM OFFER AND JUSTIFY.

THE SELLERS OBSERVATIONS BASED ON FACTS

P&L ACCOUNT

INCOME

SALES 100
 TOTAL 100

EXPENDITURE

DIRECT EXP 60

EXPENSES 25

TOTAL 85

15
25% 3.75
11.25

without synergies x

y 4% for 1st 2 years and 5% thereafter .

expected to be 51% in 1st year , 52% in 2nd and 3rd year and 50% in 4 th y
for 1st year is Rs.11 lacs and expected to go up by 10% over last year .
nd discounts / rebates ( other than interest on loans ) is 6% of sale value
 ale value. For 3rd and 4th year it is expected to be 25% and 28% .
alue shall bear interest @ 12% p.a .
ation is 15%
d of 4th year is Rs.35 lacs

0 YEAR

s.40 lacs
ing finalisation Rs. 4 lacs
acs and unrealisable work in process of Rs.2 lac

public subscription were only 1.1 times

Rs.10/- per share

o is 25 and Pbook value to market value

0% and Institutional holding of 20% the volatality is low.

their associated companies are pledged

nd 50% in 4 th year
r last year .
of sale value
DCF Method

Calculation of Enterprise Value

[Link] Particulars Current Year
A Sales 100
B Materials(Assumed)
C Direct Expenses 60
D Expenses 25
E Fixed Expenses
F Depereciation(Assumed)
(Original Value of Fixed Asset = 100
G Terminal Value = 35…Life of Asset 10 years)
H Variable Expenses
I Net Current Assets/ working Capital
(As no Current Liabilities Assumed)
J Working Capital Loan
(Only if above 20% of sale)
K Interest
L EBIT
M Less : Interest
N EBT
O Tax @ 25%
P PAT
Q Add : Depereciation (Non Cash)
R PAT for DCF Purpose
S Add : Terminal Value of Asset
T Cash Flow
U Discounting Rate @ 15%
V DCF

Acquisition Value under DCF

Book Value Method

Book Value = Net Worth

Net Worth = Capital + Reserves
Revised Reserves
1 Existing Reserves
2 Add :
Increase in Fixed Assets (Market Value)
3 Less :
Decreases in Current Assets
Bad Debts 5
Unrealised WIP 2
4 Less : Contingent Liability

5 Revised Reserves

6 Capitals
 7 Revised Book Value/ Net Worth

8 Number of Shares

9 Book Value per share

Acquisition Value under Book Value Method

Market Value Method

Book Value of Share

Add : Premium
Total Book Value of Share
Dividend
Dividend Yeild as per Book Value
Dividend Yeild as per Market Value
Market Value / Share
Book Value / Share
Price to Book Ratio
EPS
PE Ratio

Market Value per Share as per P/E Ratio

Company Valuation by PE Ratio as 25 if Price to Book is 2.5

However as it Frequently traded share but we will be unable to arrive at faair market value of company as on
and rest 20% by Financial Instititions

Acquisition Value under Market Value Method

Method Enterprise Value

Acquisition Value under DCF 80.93
Acquisition Value under Book Value Method 49
Acquisition Value under Market Value Method 281.25

We feel DCF Method shall be taken into consideration as this method will show more appropriate fair value, A
Also Market Value seems to be overvalued as P/E ratio of enterprise is more than peer review. Also this won'
Year 1 Year 2 Year 3 Year 4
104.00 108.16 113.57 119.25
10 12 12 13
53.04 56.24 59.06 59.62

11.00 12.10 13.31 14.64

6.5 6.5 6.5 6.5

6.24 6.49 6.81 7.15

20.80 21.63 28.39 33.39

- - 5.68 9.54

0 0 0.68 1.14
23.72 21.33 22.39 24.83
0.00 0.00 5.68 9.54
23.72 21.33 16.71 15.29
5.93 5.33 4.18 3.82
17.79 16.00 12.53 11.47
6.5 6.5 6.5 6.5
24.29 22.50 19.03 17.97
0.00 0.00 0.00 35.00
24.29 22.50 19.03 52.97
0.87 0.76 0.66 0.57
21.12 17.01 12.51 30.28

80.93

20

10

7
4

19

30
 49

3 Lakh Shares

16.33

49

10
10
20
1
0.05
0.87%
115
16.33
7.04 To be maintained as 2.5
3.75 3.75
30.67 As per Peer Ratio 25
overvalued as more than comparable P/E Ratio of 25

93.75
per share Value
93.75 281.25

aair market value of company as only 20% of shares are owned by public whereas 60% is holded by promoters

281.25

show more appropriate fair value, Also it takes into considerations future prospects unlike Book Value and Market Value Method.
re than peer review. Also this won't show fair value as on;y 20% of shares are being traded with public
d Market Value Method.