17 November 2007
I am preparing for CA Final. Pls. help in solving the undermentioned MAFA questions.
1. XYZ, a chain of restaurants, is considering going private.The Company believes that with elimination of the costs associated with public ownership, the company colud save Rs. 800000/- p.a.before taxes.In addition company believes that Annual profits are expected to be 10% greater than present after tax profits of Rs. 9 mio.Effective tax rate is 30%, the PE ratio is 12 and 10 million shares are outstanding. What is the present market price per share? what is the maximum premium above above this price that the company could pay in order to take the company private?
No. of shares(in Lacs)>>100 (pre merger)& 100 (in Lacs)
Market Price (In INR)>> 10.80(pre merger) & 12.552 (post Merger)
Market Value of the Company (INR Lacs)>>1080 (pre merger) & 1255.20 (post merger)
** Post merger earnings are calculated as under: Present Earnings (INR Lacs) 90.00 10% Synergic Gains (INR Lacs) 9.00 Savings (Post 30% tax)- INR 5.60 lacs Total post merger earnings (INR Lacs) 104.60
Now what is the maximum premium that should be offered to Vendor company.....assuming that all synergic gains are offered to vendor company. i.e INR 1255.2 lacs minus INR 1080 lacs = INR 175.20 lacs thus resulting in INR 1.752 per share as premium for every share over existing market price.
17 November 2007
Yes you are on the right track. I am taking the print of this page and wwork out. I feel you have adopted the right approach. I will get back to you on Monday in case there is any discrepancy. In case the answer is same then also I will inform you. Good Luck.
CAclubindia
