macrqb

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3 marks

a) Distinguish between spin-offs and split up.

b) What is meant by “Hubris hypothesis”?c) How does operating synergy differ from financial synergy?

d) What is LBO?

e) What is equity carve-out?f) What is corporate restructuring?

g) What is due-diligence?

h) Differentiate between Sell-off and Spin-off?i) What are the different types of mergers?

j) What is Value creation ion the context of Merger

k) What is Relative Valuation

7 marks

a. Explain the significance of free cash flow hypothesis

b. Write a note on the following anti take over defenses:

i) White knight ii) Poison Pilliii) Golden Parachute iv) Asset restructuring

c. Explain the motives for divestituresd. State the procedure for computing the terminal value of the firm applying DCF method in

financial evaluation, prior to merger

e. Elucidate the problems faced by the organizations after the mergers

f. Briefly explain the reasons for merger g. Explain the rationale behind joint ventures

h. Explain the five stage model of merger process?

i. Explain the motives for divestiture? j. How does Industry Life Cycle influence restructuring activities?

k. Write a note on the following:i) Poison pillii) White Knight

iii) Green mail

iv) Bear Hug

l. Explain the change forces contributing to M&A activities

m. Explain free cash flow approach to valuation of firm

n. Distinguish between Pooling of Interest method and Purchase method

10 marks

(a) Discuss the salient features of SEBI take over code(b) Explain the concept of horizontal, vertical and conglomerate mergers. Illustrate your answer

with suitable examples in the Indian context.

(c) Explain the methods of determining the purchase consideration with suitable illustrations of your own

(d) The XYZ Ltd wants to acquire ABC Ltd by exchanging its 1.6 shares for every share of

ABC Ltd. It anticipates to maintain the existing P/E ratio subsequent to the merger also.

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the relevant financial data are furnished below: Managements of both companies are

discussing two alternative proposals for exchange of shares as indicated below:

Particulars XYZ Ltd ABC Ltd

Earnings after tax(EAT) 15,00,000 4,50,000

Number of equity shares 3,00,000 75,000

Market price per share 35 40i) What is the exchange ratio based on market prices?

ii) What are pre-merger EPS and the P/E ratio for each company?iii) What was the P/E ratio used in acquiring ABC Ltd?

iv) What is the EPS of XYZ Company after the acquisition?

What is the expected market price per share of the merged company?(e) Apex Ltd. is evaluating an investment proposal to manufacture trucks for horizon Ltd. the

project will require an initial investment of Rs.10.0 lakhs in plant and equipment. This

initial investment will be depreciated straight line down to a salvage value of rs.2.0 lakhsat the end of 8 years. The project will generate revenue of Rs.3.0 lakhs and will incur

operating expenses of Rs.1.0 lakh in the first year. These revenues and expenses are

expected to grow at around 5% a year over the remaining 7 years of the project. Themarginal tax rate for the company is 36%. Estimate the free cash flows to the firm. Also

verify the effect of depreciation on the NPV of the project. (Cost of capital – 10%)

(f) State the features of “purchase method” and “pooling method” of accounting treatment

incase of mergers and acquisitions of firms with an illustration(g) A Ltd. and B Ltd. agreed to amalgamate by transferring their undertakings to a new

company. AB Ltd., formed for that purpose.

The purchase consideration consisted of i) The assumptions of the liabilities of both companies and

ii) The issue of shares at a premium of Rs.2 per share of equity shares of Rs.10 each

in AB Ltd.

On the date of the amalgamation balance sheets of the companies were as under:Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.

Authorized and

issued capitalRs. Rs. Rs. Rs.

Equity shares of

Rs.10 each

5,00,000 3,00,000 Sundry Assets 4,80,000 3,22,000

5% Debentures 2,00,000 1,00,000 Freehold property 2,00,000 1,00,000

Reserve fund -- 50,000 Investments 50,000 20,000

P and L A/c 30,000 20,000 Debtors 2,50,000 1,50,000

Mortgage loan on

free hold property

50,000 - Preliminary

expenses

20,000 8,000

Sundry Creditors 2,20,000 1,30,00010,00,00

0

6,00,000 10,00,000 6,00,000

For the purpose of the amalgamation, the assets to be revalued are as under:

A Ltd. – Rs. B Ltd. – Rs.

Good will

Sundry assets

1,00,000

4,10,000

75,000

2,80,000

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Free hold property

Investments

Debtors

2,60,000

51,000

2,25,000

1,40,000

20,000

1,35,000

Journalize the above transactions in the books of AB Ltd. Indicate the basis on which the

shares in AB Ltd. will be distributed among the share holders of A Ltd. and B Ltd.respectively.

(h) Gama fertilizers company is taking over Theta petrochemicals company. Theshareholders of Theta would receive 0.8 shares of Gama for each shares held by them.

The merger is not expected to yield in economies of scale and operating synergy. The

relevant data for the two companies are as follows:

Particulars Gama Theta

Net sales(Rs. in crore) 335 118

Profit after tax(Rs. in crore) 58 12

Number of shares(crore) 12 3

Earnings per share(Rs) 4.83 4Market value per share(Rs) 30 20

Price-earnings ratio 6.21 5

For the combined company (after merger), you are required to calculate:i) EPS

ii) P/E ratio

iii) Market value per shareiv) Number of shares

v) Total market capitalization

Also calculate the premium paid by Gama to the shareholders of Theta.

(i) What is LBO? Explain the different stages of LBO operations?(j) Explain the theories of mergers?

(k) Explain the salient features of SEBI takeover code.

(l) Discuss the Managerial challenges in the context of merger integration.(m) The balance sheet of XYZ Ltd. as on March 31st current year has the following assets and

liabilities

Liabilities Amount

(Rs. in lakhs)

Assets Amount

(Rs. in lakhs)

Equity share capital

(10 lakh shares of Rs.20 each)200 Bank balance 10

Retained Earnings 50 Debtors 25

3% debentures 100 Inventories 90Creditors and other liabilities 30 Plant and Equipment 255

Total 380 Total 380

Additional Information:

1. The company is to be absorbed by ABC Ltd. On the above date and consideration for absorption is discharge of debentures at a premium of 10%, taking over the liability in

respect of sundry creditors and other current liabilities and payment of Rs.14 in cash

and one share of Rs.10 each in ABC at the market value of Rs.16 per share in exchange

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for one share in XYZ Ltd. the cost of dissolution of Rs. 10 lakh is to be met by the

purchasing company.

The following are projected incremental free cash flows expected from acquisition for 5years

Year FCFF(Rs. in lakhs)

1 100

2 135

3 175

4 200

5 80

1. The FCFF of XYZ Ltd. is expected to be constant after 5 years.

2. Cost of capital relevant for XYZ Ltd. is 14%.Advise the company regarding financial feasibility of the acquisition.

(n)From the information given below you are required to compute the value of globalenterprise Ltd.

Asset value for year 1 = Rs.20 lakh; The assets required for business grow at 15% per

year to year 4, at 10% in years 5 and 6 and at 7% afterward; earnings for year 1 isRs.2.50 lakhs.

The earnings growth rate is 17% from year 2 to year 5, and 11% in years 6 and 7 and 7%

thereafter. The additional investment from year 1 to year 6 is given below:

Year - Investment (in Rs. Lakhs)

1 - 2.802 - 3.25

3 - 3.50

4 - 4.15

5 - 4.80

6 - 5.35

7 - 3.99

Assume the horizon to be 6 years, the long run growth rate to be 7% and the discount rate to

be 10.5%.

macrqb

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