The management of ABC Pvt Ltd is concerned about the fluctuating sales & earnings.

The variability of the companys earnings has caused its P/E ratio at about 22 to be much lower than the industry average of about 45.Details of the financials are in the table 1.1. Currently, ABC share is selling for 56.70 in the market. To boost its sales & bring stability to its earnings, ABCs management has identified Classic Chemicals Company as a possible target for acquisition. Classic is known for its quality of its products & its nation-wide markets. The company has not been performing well in the recent past due to poor management. Financial performance for the last 5 years are given in the table 1.2 Its sales have grown at 4% per year during 2006-10 as against the industry growth of 8%. The current price of Classic share is 24.90. The management of ABC is confident that after acquisition, they could turn around Classic. They could increase Classics growth to 8% per within two-three years & reduce the cost of goods sold to 66% of sales & selling and administrative expenses to 15%. ABC anticipates that to support the growth in the Classics sales, capital expenditure (CAPEX) equal to 5% of sales may be needed each year. The capital will maintain its capital structure in the market value terms at the current level. The market borrowing is 15%. The corporate tax rate is 35% & the average annual depreciation comes to 11%. What is the value of Classic Chemicals if ABC acquires it? At what price should ABC pay for each shares of Classic Chemicals Pvt Ltd.? Table 1.1

ABC Pvt Ltd summarized profit & loss account during the year ended 31 March 2010 Particulars Profit & Loss items Net Sales Less Cost of goods sold Depreciation Selling & depreciation Total Expenses Profit before interest & tax Interest Profit before tax Tax Profit after tax Amount in crores Amount in crores 8205 5975 143 1020 7138 1067 284 783 380 403

Per share data Earnings per share Divedend per share Book Value Market Value High Low Average P/E ratio High Low Average 2.56 1.8 27.49 75.05 38 56.53 29.32 14.84 22.08

ABC Pvt Ltd Summarized Balance Sheet as on 31 March 2010. Source of Funds Shareholder's Funds Paid up capital (157.50 crore shares of 10 each) Reserves & Surplus Borrowed Funds : Secured Unsecured Capital Employed Uses of Funds Gross Block Less depreciation Net Block Investments Current Assets less current liabilities Net Current Assets Net Assets Amount in crores 1575 2755 4330 1203 967 2170 6500 Amount in crores

6231 1626 4605 29 4634 3726 1860 1866 6500

Table 1.2 Classic chemicals Company Pvt Ltd. Summarized Profit & Loss statement.

Particulars Profit & Loss Items Net Sales Less :Cost of goods sold Depreciation Selling & admin expenses Total Expenses Profit before interest & tax Interest Profit before tax Tax Profit after tax Per Share Data Earnings per share Dividend per share Book Value Market Value :High Low Average P/E ratio:High Low Average

2006

2007 2008 2009 Amount in crores 1477 1042 40 275 1357 120 15 105 34 71 1580 1125 45 280 1450 130 23 107 35 72 1642 1165 45 292 1502 140 25 115 40 75

2010

1442 995 37 260 1292 150 19 131 45 86

1695 1195 40 302 1537 158 30 128 45 83

3.44 1.7 23.76 30.84 22.12 26.48 8.97 6.43 7.7

2.84 1.5 25 44.04 25.8 34.92 15.51 9.08 12.3

2.88 1.5 26.28 42.25 24.38 33.32 14.67 8.47 11.57

3 1.7 27.68 35.48 16.28 25.88 11.83 5.43 8.27

3.32 2.2 29.2 28.16 13.14 20.65 8.48 3.96 6.22

Classic Chemicals Company: Summarized Balance sheet as on 31 March 2010

Balance Sheet items Sources of funds Shareholders funds ( 10 each) Reserves & surplus Borrowed Funds : Secured Unsecured Capital Employed Uses of funds Gross Block Less depreciation Net Block Investment Current Assets less current liabilities Net Current Assets Net Assets

Amount in crores

Amount in crores

250 425 200 95

675

295 970

657 285 372 23 753 178 575 970