Reference no: EM132219550

MERGERS & ACQUISITIONS QUESTION:

The summarized balance sheet of Target Ltd as at 31st Dec 2018 is given below:

Liabilities	Amount ($)	Assets	Amount ($)
Equity share capital (200000 shares @ $10 each)	2000000.00	Fixed assets	1900000.00
13% Preference share capital	100000.00	Investments	100000.00
Retained earnings	400000.00	Inventories	500000.00
12% debentures	300000.00	Debtors	400000.00
Current liabilities	200000.00	Bank	100000.00
	3000000.00		3000000.00

Negotiations for take-over of T ltd, result in its acquisition by A Ltd .The purchase consideration consists of (i) $ 330000 13% Debentures of A ltd for redeeming the 12% Debentures of T ltd. (ii) $ 100000 12 % Convertible preference shares in A Ltd for the payment of the Preference share capital of T Ltd. (iii) 150000 equity shares in T Ltd, to be issued at its current market price ($ 15) (iv) A Ltd would meet dissolution expenses (estimated to cost $ 30000.00).

The break-up figures of eventual disposition by T Ltd of its unrequited assets and liabilities are Investments ($ 125000) , Debtors ($ 350000) , Inventories ($ 425000) and payment of current liabilities $ 190000

The project is expected to generate yearly operating CFAT of $ 700000.00 for 6 years. It is estimated that fixed assets of T Ltd would fetch $ 300000 t he end of the 6th year. The firm's cost of capital is 15%. As a financial consultant, comment on the financial prudence of merger decision of A Ltd.