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

Pioneer Ltd earns Rs 50 crore pre-tax and Target Ltd earns Rs 30 crore pre-tax. Post-merger, operating economies reduce combined costs by Rs 8 crore per year, perpetually. Tax rate is 25% and the appropriate capitalisation rate for the savings is 10%. What is the value of the operating synergy?

The operating synergy is worth Rs 60 crore. Annual cost savings of Rs 8 crore become Rs 6 crore after 25% tax, and a perpetuity of Rs 6 crore capitalised at 10% gives Rs 60 crore. Ignoring tax would wrongly give Rs 80 crore.

  1. ARs 80 crore
  2. BRs 60 croreCorrect
  3. CRs 106.67 crore
  4. DRs 32 crore

Explanation

After-tax savings = 8 x (1 - 0.25) = Rs 6 crore. Capitalised at 10% perpetuity = 6/0.10 = Rs 60 crore. Rs 80 crore ignores tax; Rs 106.67 crore wrongly divides by 0.75 again.

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