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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Financial Management

Meghnad Textiles Ltd has 20 lakh shares. A proposed project will raise firm value by Rs 6 crore, but the CEO prefers an acquisition that adds Rs 1 crore to firm value and gives her personal prestige. If the firm chooses the acquisition, what is the loss in value per share to shareholders arising from this agency conflict?

The loss is Rs 25 per share. Shareholders forgo Rs 6 crore of project value but gain only Rs 1 crore from the acquisition, a net loss of Rs 5 crore, which spread over 20 lakh shares equals Rs 25 per share.

  1. ARs 25Correct
  2. BRs 30
  3. CRs 5
  4. DRs 35

Explanation

Value forgone = Rs 6 crore - Rs 1 crore = Rs 5 crore = Rs 5,00,00,000. Dividing by 20,00,000 shares gives Rs 25 per share. Rs 30 uses only the project's gain, ignoring the acquisition's gain; Rs 5 uses the acquisition's gain per share; Rs 35 wrongly adds the two values.

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