H Ltd. agrees to buy over the business of B Ltd. effective from 1st April, 2026. The summarized Balance Sheets of H Ltd. and B Ltd. as on 31st March…

CA Final · Advanced Financial Management · MTP · November 2026
H Ltd. agrees to buy over the business of B Ltd. effective from 1st April, 2026. The summarized Balance Sheets of H Ltd. and B Ltd. as on 31st March 2026 are as follows: Balance sheet as at 31st March, 2026 (In Crores of Rupees) Liabilities: H. Ltd B. Ltd. Paid up Share Capital Equity Shares of ₹ 100 each 350.00 Equity Shares of ₹ 10 each 6.50 Reserve & Surplus 950.00 25.00 Total 1,300.00 31.50 Assets: Net Fixed Assets 220.00 0.50 Net Current Assets 1,020.00 29.00 Deferred Tax Assets 60.00 2.00 Total 1,300.00 31.50 H Ltd. proposes to buy out B Ltd. and decided to issue 11,61,550 shares of ₹ 100 each to the shareholders of B Ltd. As per the terms of the exchange ratio was on a Fair Value basis arrived on the Net Asset basis and Earnings capitalization method respectively for both H Ltd. and B Ltd. Additional information is provided to you as part of the scheme of buying: (1) The weighted average post tax maintainable profits of H Ltd. and B Ltd. for the last 4 years are ₹ 300 crores and ₹ 10 crores respectively. (2) Both the companies envisage a capitalization rate of 8%. (3) H Ltd. has a contingent liability of ₹ 300 crores as on 31st March, 2026. Required: Apprise the weights assigned to values of shares based on Net Asset basis and Earnings capitalization method for arriving at the Fair Value. Note: Round off calculations upto 4 decimal points while computing ratio of weights assigned and values of shares upto 2 decimal points.

Suggested Answer and Working Notes:

Working Notes: Let us first calculate the Net asset value and Earning capitalization value per share of both companies as follows: (i) Net asset value H Ltd. (1300 Crores - 300 Crores) / 3.50 Crores = 285.71 B Ltd. (31.50 Crores) / 0.65 Crores = 48.46 (ii) Earning capitalization value H Ltd. (300 Crores / 0.08) / 3.50 Crores = 1071.43 B Ltd. (10 Crores / 0.08) / 0.65 Crores = 192.31 (iii) Ratio of Issue of Shares = 11,61,550 shares / 65,00,000 shares = 0.1787 i.e. 0.1787 share of H Ltd. for 1 share of B Ltd. Now let us assume weight assigned to valuation as per Net Asset basis and Earnings capitalization method is A and B respectively. Accordingly, A + B = 1 (1) (₹ 48.46 × A + ₹ 192.31 × B) / (₹ 285.71 × A + ₹ 1071.43 × B) = 0.1787 (2) On solving simultaneous equations (1) and (2) we shall get values as follows: A = 0.2456 i.e. 24.56% or 25% B = 0.7544 i.e. 75.44% or 75% Thus, the weights assigned for the value of shares arrived on Net Asset basis and Earnings capitalization method are 24.56% or 25% and 75.44% or 75% respectively for both H Ltd. and B Ltd.

Topics: Mergers, Acquisitions and Corporate Restructuring, Business Valuation

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