11. Business Valuation – Fair Value ApproachH Ltd agrees to buy over the business of B Ltd effective 01.04.2013. The summarized BalanceSheet of H Ltd and B Ltd as on 31.03.2013 are as follows – (Rs Crores)LiabilitiesH LtdB LtdAssetsH LtdBLtdPaid Up Share Capital – Equity Shares of Rs.100 eachReserves & Surplus3509506.5025.00 Net Fixed Assets Net Current Assets Deferred Tax Asset 220 1,020 60 0.50 29.00 2.00 Total 1,300 31.50 Total 1,300 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 –
a.Weighted Average Post Tax Maintainable Profits of H Ltd & B Ltd for the last 4 yearsare Rs 300 Crores & Rs 10 Crores respectively.b.Both the Companies envisage a Capitalization Rate of 8%.c.H Ltd has a Contingent Liability of Rs 300 Crores as on 31.03.2013d.H Ltd to issue Shares of Rs100 each to the Shareholders of B Ltd in terms of ExchangeRatio arrived on a Fair Value Basis.Solution: You are required to arrive at the value of the Shares of both H Ltd and B Ltd under – a. Net Asset Value Method b. Earnings Capitalization Method c. Exchange Ratio of Shares of H Ltd to be issued to the Shareholders of B Ltd on a Fair Value Basis (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). 1. Computation of Value per Share under Net Assets Method Particulars H Ltd B Ltd (a) Total Assets (b) Contingent Liabilities 1,300 Crores (300) Crores 31.50 Crores NIL (c) Net Asset Value of the Company (a)-(b) 1,000 Crores 31.50 Crores (d) No. of Equity Shares (Paid up Capital ÷ Face Value) 3.50 Crores 0.065 Crores (e) Net Asset Value per Share (c) ÷ (d) Rs.285.71 Rs.484.6 Note: Contingent Liabilities have been subtracted following the concept of prudence. Alternatively, settlement of Contingent Liability may be considered as remote and ignored. 2. Computation of Value per Share under Earnings Capitalization Method 3. Computation of Exchange Ratio (on per Share Basis) Co. NAV per Share Weight Product ECV per Share Weight Product Total Weighted Average Value per Share (1) (2) (3) (4)=(2x3) (5) (6) (7)=(5x6) (8)=(4+7 ) (9)= ( 8 ) ( 3 ) + ( 6 ) H Ltd 285.71 1 285.71 1071.4 3 3 3214.29 3500 875 Particulars H Ltd B Ltd (a) Future Maintainable Earnings after Tax 300 Crores 10 Crores (b) Capitalization Rate (after Tax) 8% 8% (c) Value of Equity (a) ÷ (b) 3,750 Crores 125 Crores (d) No. of Equity Shares 3.5 Crores 0.065 Crores (e) Value per Share (c) ÷ (d) Rs.1,071.43 Rs.1923.1
B Ltd 484.6 1 484.6 1923.1 3 5769.3 6253.9 1563.475 Exchange Ratio = Value of SellingCompany ' s Shares Value of BuyingCompany ' sShares = 156.3475 875 = 1.787 = 0.1787 Shares of H Ltd, per share of L Ltd. 12. Business Valuation – Net Assets Value and Dividend Valuation Model Two Companies ABC Ltd and XYZ Ltd are in same industry. To increase its size, ABC Ltd made a takeover bid for XYZ Ltd. Equity beta of ABC and XYZ is 1.20 and 1.05 respectively. Risk Free Rate 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.