CMA Final · Strategic Performance Management and Business Valuation · Valuation in Mergers and Acquisitions
Aarav Ltd is considering acquiring Bhavya Ltd. Stand-alone values are Aarav Rs 600 crore and Bhavya Rs 200 crore. The combined firm is expected to be worth Rs 880 crore. Aarav will pay Rs 240 crore in cash for Bhavya. What is the net present value of the acquisition to Aarav's shareholders?
The NPV to Aarav's shareholders is Rs 40 crore. Synergy is 880 minus 800, which is Rs 80 crore, and the premium paid over Bhavya's stand-alone value is Rs 40 crore. The acquirer's gain is synergy less premium.
- ARs 40 croreCorrect
- BRs 80 crore
- CRs 0
- DRs 120 crore
Explanation
Synergy = 880 - (600 + 200) = Rs 80 crore. Premium paid = 240 - 200 = Rs 40 crore. NPV to acquirer = 80 - 40 = Rs 40 crore. Rs 80 crore ignores the premium paid; Rs 120 crore wrongly adds the premium.
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