CAIIB Paper 3 Module C Quiz 10

A conglomerate merger combines businesses in unrelated industries; diversification alone does not guarantee value creation. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

Exchange ratio = target price ÷ acquirer price = ₹120/₹240 = 0.50 acquirer shares per target share.

Premium = (offer − unaffected price)/unaffected price × 100 = (150 − 120)/120 × 100 = 25%.

Percentage change = (post EPS − standalone EPS)/standalone EPS × 100 = (13.20 − 12)/12 × 100 = 10% accretion.

Goodwill = consideration − fair value of identifiable net assets = ₹500 − ₹370 = ₹130 crore, subject to applicable accounting rules.

Incremental NPV = PV benefits − PV costs = ₹200 − ₹160 = ₹40 crore.

An earn-out makes part of consideration depend on future performance, helping bridge buyer/seller expectations but potentially creating disputes. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

Consideration is allocated to identifiable acquired assets and assumed liabilities at acquisition-date fair values; residual goodwill may arise. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

Early planning supports systems, people, customer and synergy execution, while respecting competition-law restrictions on pre-closing coordination. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

An LBO finances a significant part of the acquisition with debt, relying on cash flows and/or assets for debt service, subject to structure and law. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

A divestiture is disposal of a business, subsidiary or asset, often to sharpen focus or raise capital. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

A higher discount rate reduces present value of future cash flows, all else equal. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

Terminal value = next-period cash flow/(WACC − g); increasing sustainable growth narrows the denominator and increases value. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

Forecasts, discount rates, comparable selection and transaction assumptions are uncertain; a range communicates uncertainty and avoids false precision. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

It compares actual outcomes with the deal thesis, forecast and synergy targets, identifying lessons for future transactions. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

FCFF is available to both debt and equity providers, so it is discounted at WACC to estimate enterprise value. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

FCFE is cash flow available to equity holders after operating investment and net borrowing; use cost of equity. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

Terminal value = next-year FCFF/(WACC − growth) = ₹61/(15% − 3%) = approximately ₹508.33 crore. Perpetual growth must remain below WACC.

An increase ties up cash in receivables or inventory net of payables, so it is deducted in the cash-flow calculation. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.

Depreciation is a non-cash accounting expense; it is added back, while actual capital expenditure is deducted separately. In an exam scenario, state the relevant assumption and avoid double counting or mixing valuation bases.