Case Objectives:
This case tries to make a simplistic effort to achieve certain moderate objectives such as: (1) Making you
understand nature and importance of investment decisions, (2) Enabling calculation of project cash flows
and trying to figure-out what is the difference between the Cash Flows and the Accounting Profits (and
why should it be so?), (3) Enabling calculations of discounted cash flows, (4) Making you understand
various DCF/non-DCF techniques of evaluation of investment proposals; and (5) Lastly, enabling you to
take a proper objective decision about this crucial, long-term, high-stakes, and risky (mostly irreversible)
issue.
The exercise given at the end of the case will ask you to focus on every aspect of these stated objectives
on a basic conceptual level. We are not going to bring-in the market sentiments or market uncertainties
into this simple exercise. So I strongly urge you to think ‘simple’ and not to start floating in typical
‘MBA-Jargon’. This statement is made here mainly in connection of the second part of the exercise given
to you at the end of the case.
Case Description:
As such it was a bad morning for you. Last night’s party hangover was still there. The nagging headache
was troubling you and it was somehow not getting cured in-spite of double shots of aspirins’ and
numerous cups of black coffee. The party was thrown by your CFO Ms. Cheeky Kamchor to celebrate of
your promotion to Sr. Financial Analyst position in your company ‘Least Reliance Energy Limited’, an
energy distribution company.
The company in recent years was really on go, as it had bagged three new distribution blocks in last two
years’ government auctions. The rumors in the markets were pointing to a close connection of your CEO
Mr. Jealousbhai Nautanki with the Energy Minister. But then rumors are just ‘rumors’, and why should
you be bothered about it, as your career path is on the move. Added to the excellent work conditions, your
boss Ms. Cheeky was extremely co-operative and understanding.
But then today’s problem is your own doing, and Ms. Cheeky was least bothered about it, as she was
feeling the heat since morning from her CEO to analyze and submit all necessary results within a couple
of days to him, before the real due-diligence process was to begin.
All this was going through your mind when she called you up in her office, and started explaining the
issue at hand. She wanted you to take-up this matter leaving aside all other tasks and submit to her your
Course ‘Financial Management’ findings by tomorrow 10:00 am sharp. Looks like you had to somehow
forget your headache and start working immediately.
This is what she explained to you; your company is thinking of acquiring another corporation in the
similar line of business. Since the three contracts which were bagged in quite a short period, the Board of
Directors of you company were of the opinion that it would be better to acquire a company to quickly
expand operations and capacities, rather than build capacities on your own, which will be far more
expensive and time-consuming. The Investment Bankers engaged by your company had short-listed two
possible targets and were waiting for your internal opinion before they could go ahead with detailed
valuation, due-diligence, negotiations, and arranging for requisite funds to initiate the take-over.
Ms Cheeky asks you to evaluate the data as given below and further to submit your detailed findings
through two approaches.
(1) First, assuming there is no ‘capital rationing’, as the status your company enjoyed in the capital
markets, the Investment Bankers could easily arrange for all the necessary funds required for acquisitions
– either of the company or both;
(2) Second, assuming the cost of each choice is Rs. 25,000,000. You cannot spend more than that, so
acquiring both corporations is not an option.
The following are your critical case data:
(A) Load-Shedding Corporation Limited:
a. Revenues = 10,000,000/- in year one, increasing by 10% each year.
b. Expenses = 2,000,000/- in year one, increasing by 15% each year.
c. Depreciation Expense = 500,000/- each year (uniform).
d. Tax Rate = 25%
e. Discount Rate = 10%
(B) Power-Cut Corporation Limited:
a. Revenues = 15,000,000/- in year one, increasing by 8% each year.
b. Expenses = 6,000,000/- in year one, increasing by 10% each year.
c. Depreciation Expense = 1,000,000/- each year (uniform).
d. Tax Rate = 25%
e. Discount Rate = 11%
Your ‘ordinary’ task:
(‘Ordinary’ meaning you have to do this by tomorrow 10:00 am else you lose your job right there!)
Your need to present your report on the basis of following calculations carried out for both the companies
and remarks thereon:
(1) A 5-year projected income statements;
(2) A 5-year projected cash flows;
(3) Net Present Value calculations;
(4) Internal Rate of Return;
(5) Profitability Index;
(6) Payback Period;
(7) Discounted Payback Period;
(8) Modified Internal Rate of Return;
(9) Based on items (1) through (8), which company/ies would you recommend acquiring?
Your ‘extraordinary’ task:
‘(‘Extraordinary’ meaning even if you don’t do this Ms Cheeky is going to retain your job but might just
open-up your personal appraisal review report to reconsider your latest promotion!)
You further need to dig into some economic & business data during the past years or so (Tip: the CMIE
database might just come in handy for you… but then off-course you are the ‘king/or/Queen’ so you may
very well trust your own authentic sources!), and try to find-out whether there was any such
merger/takeover/amalgamation in India or abroad, in the same business sector? If you could find one,
then write a 1-only A4 size paper report on the same. It will be better if you could use certain guidelines
to write this report as: Which were the parties involved, was it a complete takeover (friendly or hostile) or
was it a sort of stake-purchase or was it an amalgamation or something like that, what is it mean by ‘open
offer’ in India, how the takeover/merger was funded, & why was the takeover/merger at all?
This case tries to make a simplistic effort to achieve certain moderate objectives such as: (1) Making you
understand nature and importance of investment decisions, (2) Enabling calculation of project cash flows
and trying to figure-out what is the difference between the Cash Flows and the Accounting Profits (and
why should it be so?), (3) Enabling calculations of discounted cash flows, (4) Making you understand
various DCF/non-DCF techniques of evaluation of investment proposals; and (5) Lastly, enabling you to
take a proper objective decision about this crucial, long-term, high-stakes, and risky (mostly irreversible)
issue.
The exercise given at the end of the case will ask you to focus on every aspect of these stated objectives
on a basic conceptual level. We are not going to bring-in the market sentiments or market uncertainties
into this simple exercise. So I strongly urge you to think ‘simple’ and not to start floating in typical
‘MBA-Jargon’. This statement is made here mainly in connection of the second part of the exercise given
to you at the end of the case.
Case Description:
As such it was a bad morning for you. Last night’s party hangover was still there. The nagging headache
was troubling you and it was somehow not getting cured in-spite of double shots of aspirins’ and
numerous cups of black coffee. The party was thrown by your CFO Ms. Cheeky Kamchor to celebrate of
your promotion to Sr. Financial Analyst position in your company ‘Least Reliance Energy Limited’, an
energy distribution company.
The company in recent years was really on go, as it had bagged three new distribution blocks in last two
years’ government auctions. The rumors in the markets were pointing to a close connection of your CEO
Mr. Jealousbhai Nautanki with the Energy Minister. But then rumors are just ‘rumors’, and why should
you be bothered about it, as your career path is on the move. Added to the excellent work conditions, your
boss Ms. Cheeky was extremely co-operative and understanding.
But then today’s problem is your own doing, and Ms. Cheeky was least bothered about it, as she was
feeling the heat since morning from her CEO to analyze and submit all necessary results within a couple
of days to him, before the real due-diligence process was to begin.
All this was going through your mind when she called you up in her office, and started explaining the
issue at hand. She wanted you to take-up this matter leaving aside all other tasks and submit to her your
Course ‘Financial Management’ findings by tomorrow 10:00 am sharp. Looks like you had to somehow
forget your headache and start working immediately.
This is what she explained to you; your company is thinking of acquiring another corporation in the
similar line of business. Since the three contracts which were bagged in quite a short period, the Board of
Directors of you company were of the opinion that it would be better to acquire a company to quickly
expand operations and capacities, rather than build capacities on your own, which will be far more
expensive and time-consuming. The Investment Bankers engaged by your company had short-listed two
possible targets and were waiting for your internal opinion before they could go ahead with detailed
valuation, due-diligence, negotiations, and arranging for requisite funds to initiate the take-over.
Ms Cheeky asks you to evaluate the data as given below and further to submit your detailed findings
through two approaches.
(1) First, assuming there is no ‘capital rationing’, as the status your company enjoyed in the capital
markets, the Investment Bankers could easily arrange for all the necessary funds required for acquisitions
– either of the company or both;
(2) Second, assuming the cost of each choice is Rs. 25,000,000. You cannot spend more than that, so
acquiring both corporations is not an option.
The following are your critical case data:
(A) Load-Shedding Corporation Limited:
a. Revenues = 10,000,000/- in year one, increasing by 10% each year.
b. Expenses = 2,000,000/- in year one, increasing by 15% each year.
c. Depreciation Expense = 500,000/- each year (uniform).
d. Tax Rate = 25%
e. Discount Rate = 10%
(B) Power-Cut Corporation Limited:
a. Revenues = 15,000,000/- in year one, increasing by 8% each year.
b. Expenses = 6,000,000/- in year one, increasing by 10% each year.
c. Depreciation Expense = 1,000,000/- each year (uniform).
d. Tax Rate = 25%
e. Discount Rate = 11%
Your ‘ordinary’ task:
(‘Ordinary’ meaning you have to do this by tomorrow 10:00 am else you lose your job right there!)
Your need to present your report on the basis of following calculations carried out for both the companies
and remarks thereon:
(1) A 5-year projected income statements;
(2) A 5-year projected cash flows;
(3) Net Present Value calculations;
(4) Internal Rate of Return;
(5) Profitability Index;
(6) Payback Period;
(7) Discounted Payback Period;
(8) Modified Internal Rate of Return;
(9) Based on items (1) through (8), which company/ies would you recommend acquiring?
Your ‘extraordinary’ task:
‘(‘Extraordinary’ meaning even if you don’t do this Ms Cheeky is going to retain your job but might just
open-up your personal appraisal review report to reconsider your latest promotion!)
You further need to dig into some economic & business data during the past years or so (Tip: the CMIE
database might just come in handy for you… but then off-course you are the ‘king/or/Queen’ so you may
very well trust your own authentic sources!), and try to find-out whether there was any such
merger/takeover/amalgamation in India or abroad, in the same business sector? If you could find one,
then write a 1-only A4 size paper report on the same. It will be better if you could use certain guidelines
to write this report as: Which were the parties involved, was it a complete takeover (friendly or hostile) or
was it a sort of stake-purchase or was it an amalgamation or something like that, what is it mean by ‘open
offer’ in India, how the takeover/merger was funded, & why was the takeover/merger at all?
No comments:
Post a Comment