Rajalakshmi mills hostile takeover defense.

Rajalakshmi Mills is one of the leading cotton mills in Coimbatore. At the same time, it has a
major competitor, Binny Mills, which is planning to take over the Rajalakshmi Mills in a hostile
takeover for a value of Rs.420 million. Rajalakshmi Mills used a tactic of making the takeover
unattractive by window dressing its market value with a few embellished estimations. So, with
the help of a major financial consultant, they want to evaluate and estimate the following: Its
estimated sales revenues for the next 8 years are given below.

Year Sales revenue in Its condensed balance sheet as on March 31, current year is as
Rs. follows.
1 80000000
Liabilities Amount Assets Amount
2 100000000
Equity funds 120000000 Current Assets 30000000
3 150000000
12% debt 80000000 Long-term 170000000
4 220000000
Assets
5 300000000
200000000 200000000
6 260000000
• Its variable expenses will amount to 40% of sales
7 230000000
8 200000000 revenue. Fixed cash operating costs are estimated to be Rs.
16 million per year for the first 4 years and at Rs. 20 million
for the years 5-8. In addition, an extensive advertisement campaign will be launched,
requiring annual outlays as follows:
year Amt in Rs.
1 5
2-3 15
4-6 30
7-8 10

• Long-term assets are subject to a 15% rate of depreciation on a diminishing balance

method.
• The company has planned the following capital expenditure (investment on machinery)
for the next 8 years (from the beginning of each year)
Year Amount in Rs. o Working capital in terms of investment in current assets is
1 5000000 estimated at 20% of sales revenue.
2 8000000 o It is expected to have non-operating assets in terms of
3 20000000 investments in marketable securities in the initial year. The
4 25000000 expected after-tax non-operating cash flow in year 1 is Rs.
5 35000000 500000.
6 25000000 o Given the tax benefits available to the Rajalakshmi mills, the
7 15000000
effective tax rate is estimated at 30%.
8 10000000
o The corporate equity capital is estimated at 16%. The FCFF is
expected to grow at 5% per annum after 8 years.

Determine the discounted cash flow of the firm and the discounted value of the
equity, i.e., the existing value per share. Find out if it's EVA for 8 years as a
consultant.