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CS Professional · Corporate Restructuring, Valuation and Insolvency · Planning and Strategy

Before merging with Godavari Pharma Ltd, an acquirer's due diligence reveals that Godavari has an unrecorded guarantee of Rs 30 crore given for a group company whose loan is overdue. Godavari's agreed equity value was Rs 200 crore. The acquirer estimates a 40 percent probability of the guarantee being invoked in full and wants the price reduced by the expected loss. What is the adjusted equity value?

The adjusted equity value is Rs 188 crore. The expected loss on the contingent guarantee is 40 percent of Rs 30 crore, or Rs 12 crore, which is deducted from the agreed Rs 200 crore, rather than deducting the full guarantee amount.

  1. ARs 188 croreCorrect
  2. BRs 170 crore
  3. CRs 200 crore
  4. DRs 182 crore

Explanation

Expected loss = 30 x 40% = Rs 12 crore. Adjusted value = 200 - 12 = Rs 188 crore. Rs 170 crore deducts the full guarantee, ignoring probability; Rs 200 crore ignores the contingent liability entirely.

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