Course : PGDM  

Trimester V
Div. Finance   Marks 30
th
Date: 18 December 2021   Time : 1:30 Hours 
Subject : Mergers & Acquisitions and Corporate Restructuring – Set - I

INSTRUCTIONS
1. Question No. 1 is compulsory and carries 10 Marks.
2. From the remaining 3 questions, answer any 2. Each question carries 10 Marks.
3. For each question attempted, all sub-questions, if any, must be answered.

Q. No. 1 Case Study or any other situation/scenario based question

Williamson Corporation is engaged in electrical and fluid (mostly pumps) equipment maintenance
and sales for mid-market-size companies. In this regard, it is relatively capital intensive. Its most
recent year-end financial statement reflects revenues of ₹112 million, operating income of ₹28
million, depreciation of ₹7 million, net income after taxes of ₹12 million, total assets of ₹172 million,
interest-bearing debt of ₹54 million, and shareholders’ equity of ₹40 million. Its cash position is
negligible. The company has 5.6 million shares outstanding and its current share price is ₹16.25.

The company has attracted the attention of Tata Industries Ltd., which is considering acquiring
Williamson Corporation. Tata Industries and its investment banker believe that by offering a
premium of 40% Williamson can be acquired. Presently, Williamson’s free cash flow (excluding
interest on debt) is the following:

Operating profits after taxes ₹17 million

Depreciation 7
Total ₹24
Less: capital expenditures 8
Working-capital additions 3
Free cash flow ₹13

Tata Industries believes that with synergy, it can grow EBITDA by 20% per annum for 3 years, and
then by 12% for the next 3 years. At the same time, it believes it can hold capital expenditures and
working capital additions to a combined increase (from the present ₹11 million) of only ₹2 million
per year. At the end of 6 years, Tata Industries assumes that free cash flow will grow at 5% per
annum into perpetuity. It also assumes that the required discount rate for such an investment is
15%.

Comparable recently acquired companies have had the following median valuation ratios:
Equity value-to-book 2.9x
Enterprise value-to-sales 1.4x
Equity value-to-earnings 15.3x
Enterprise value-to-EBITDA 7.8x

You are the CFO of Tata Industries Ltd. Does the acquisition of Williamson Corporation make sense
to you? What is your recommendation? 10 Marks (CO1, CO2, Co3)

TM: Page 1 of 3
 Course : PGDM  
Trimester V
Div. Finance   Marks 30
th
Date: 18 December 2021   Time : 1:30 Hours 
Subject : Mergers & Acquisitions and Corporate Restructuring – Set - I

Q. No. 2 (A) Based on its growth prospects, a private investor values a local bakery at ₹750,000. She
believes that cost savings having a present value of ₹50,000 can be achieved by changing staffing
levels and store hours. She believes the appropriate liquidity discount is 20%. A recent transaction in
the same city required the buyer to pay a 5% premium to the average price for similar businesses to
gain a controlling interest in a bakery. What is most she would be willing to pay for a 50.1% stake in
the bakery? 5 Marks (CO1, CO2)

Q. No. 2 (B) ABC Company is considering the acquisition of XYZ Company with stock. Relevant
financial information is as follows:

ABC XYZ
Present earnings (in thousands) ₹4,000 ₹1,000
Common shares (in thousands) 2,000 800
Earnings per share ₹2.00 ₹1.25
Price/earnings ratio 12x 8x

ABC plans to offer a premium of 20% over the market price of XYZ stock.

a. (1) What is the ratio of exchange of stock? (2) How many new shares will be issued?
2 Marks (CO2, CO3)
b. What are earnings per share for the surviving company immediately following the
merger? 1 Mark (CO2, CO3)
c. (1) If the price / earnings ratio stays at 12 times, what is the market price per share
of the surviving company? (2) What would happen if it went to 11 times?
2 Marks (CO2, CO3)

Q. No. 3. Kumar Enterprises is considering going private through a leveraged buyout by

management. Management presently owns 21% of the 5 million shares outstanding. Market price
per share is ₹20, and it is felt that a 40% premium over the present price will be necessary to entice
public stockholders to tender their shares in a cash offer. Management intends to keep their shares
and to obtain senior debt equal to 80% of the funds necessary to consummate the buyout. The
remaining 20% will come from junior subordinated debentures. Terms on the senior debt are 2%
above the prime rate, with principal reductions of 20% of the initial loan at the end of each of the
next 5 years. The junior subordinated debentures bear a 13% interest rate and must be retired at the
end of 6 years with a single balloon payment. The debentures have warrants attached that enable
the holders to purchase 30% of the stock at the end of year 6. Management estimates that EBIT will
be ₹25 million per year. Because of tax-loss carry forwards, the company expects to pay no taxes
over the next 5 years. The company will make capital expenditures in amounts equal to its
depreciation.
a. If the prime rate is expected to average 10% over next 5 years, is the leveraged buyout
feasible? 5 Marks (CO3, CO4)
b. What if it averaged only at 8%? 3 Marks (CO3, CO4)

TM: Page 2 of 3
 Course : PGDM  
Trimester V
Div. Finance   Marks 30
th
Date: 18 December 2021   Time : 1:30 Hours 
Subject : Mergers & Acquisitions and Corporate Restructuring – Set - I

c. What minimal EBIT is necessary to service the debt? 2 Marks (CO3, CO4)

Q. No. 4. Explain the following:

a. Net Purchase Price 2 Marks (CO3, CO4)
b. Pooling of interest method of accounting 2 Marks (CO3, CO4)
c. Bear Hug 2 Marks (CO3, CO4)
d. Post-merger integration 2 Marks (CO3, CO4)
e. Poison Pill 2 Marks (CO3, CO4)

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TM: Page 3 of 3