A firm is planning to acquire another firm with s predictionthat the IRR will be 15%

the cash inflow of the combined firm is projected as

1
2
3
4
5
6
7
8
and after 8th year it grows by 10% forever , the target firm's
capital structure is as follows
1000 crores of equity share capital with 18% assured dividends
retained earnings 500 crores
deb. Capital 1500 crores with int. rat of 22%
Pref share capital 500 crores with dividend rate of 19%
when corporate tax rate is 40%

The acquiring firm is planning to acquire with consideration as follows-:

Issuing the equity share for 1000 crores ( in continuaation of 500 crores retained earnings)
converting deb. Value into 1000 crores and paying 500 crores in cash
where interest rate is 20% for the debenture
prefrence share holders are fully paid
Calculate the fin. Feasibility and comment

Solution
equity shares 1000 equity shares
Deb. Holders 500 Deb. Holders
Pref. Retained earning
 -2000
450
650
750
700
500
700
900
1000
27% 0
pv 2928.501
pc 2000
npv 928.501 1) Diff in IRR
2) IRR (cal.) vs WACC
3) Feasibility
4) Comment

equity shares 1000 18 0.4 7

Deb. Holders 1000 12 0.4 5
Retained earning 500 18 0.2 4
2500 48 WACC 15

Purchase consideration

Total available fund

eq. shares issued 1000cr

Payment to debenture holders 500cr
Payment to eprefrence shareholders 500cr
2000cr