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CA Final · Advanced Financial Management · Mergers, Acquisitions and Corporate Restructuring

Himalaya Tools Ltd is bought out by its management for an enterprise value of Rs 150 crore, financed by Rs 105 crore debt at 10% interest and Rs 45 crore equity. The sponsors expect to exit after 4 years. Debt at exit is Rs 65 crore, and the exit enterprise value is Rs 225 crore. What is the approximate equity IRR (no interim payouts)? Use (3.556)^(1/4) ≈ 1.373.

Exit equity equals Rs 225 crore less Rs 65 crore debt, or Rs 160 crore. Against Rs 45 crore invested, the multiple is 3.556 times over four years, so IRR is the fourth root minus one, approximately 37.3% per year.

  1. AAbout 37.3%Correct
  2. BAbout 50.0%
  3. CAbout 25.7%
  4. DAbout 18.9%

Explanation

Exit equity = 225 - 65 = Rs 160 crore. Multiple = 160/45 = 3.556. IRR = 3.556^(1/4) - 1 = 1.373 - 1 = 37.3%. Using 225/150 = 1.5 (enterprise growth) gives about 10.7%, and simple averaging of the 255.6% gain over 4 years gives roughly 64%, both wrong; 50% ignores compounding.

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