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

Sundaram Holdings plans to buy 100% of Kaveri Foods Ltd for an enterprise value of Rs 200 crore. The financing is 70% debt and the rest sponsor equity. Kaveri's EBITDA is Rs 40 crore. What are the sponsor equity contribution and the opening Debt/EBITDA multiple?

Sponsor equity is Rs 60 crore, being 30% of Rs 200 crore, and debt is Rs 140 crore. Dividing debt by EBITDA of Rs 40 crore gives an opening leverage multiple of 3.5 times.

  1. ARs 60 crore equity; 3.5 timesCorrect
  2. BRs 140 crore equity; 3.5 times
  3. CRs 60 crore equity; 5.0 times
  4. DRs 60 crore equity; 1.5 times

Explanation

Debt = 70% x 200 = Rs 140 crore; equity = 200 - 140 = Rs 60 crore. Debt/EBITDA = 140/40 = 3.5 times. Rs 140 crore equity confuses debt with equity; 5.0 times uses the enterprise value divided by EBITDA (200/40).

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